Information asymmetry occurs when one party in a transaction has more or better information than the other. I can’t think of a situation where this imbalance of power is more often on display than when it comes to buying a car.
Think about it. The salesperson shows you a couple of vehicles, you take one for a test drive, become enamoured, and then get whisked away to a corner office to discuss financing terms.
If you’re making an impulse buy, you likely haven’t given much thought as to how you’ll finance your new vehicle. Your dealer will throw around terms such as “Zero-percent financing” “Dealer invoicing” “Manufacturer’s rebate”.
Financing a Vehicle
Buying a car is an emotional experience; more than just four wheels, it’s how you feel when you get behind the steering wheel. Car dealers and salespeople know that once you’ve fallen in love with a vehicle you’re unlikely to walk away without making a deal.
Hopefully you’ve given some thought to the car buying process long before stepping foot onto a car lot. You know that you can arrange financing ahead of time through your bank, or you can set-up a loan through the car dealership on the spot.
Some dealerships offer financing through their manufacturer, such as Ford or GM. Others, like the Hyundai dealership where I bought a new Sante Fe in 2012, arrange financing through a bank. In my case, the four-year, 0.9% financing deal was arranged by Hyundai through Scotiabank.
You’ll often hear that you get the best deal on a new car when you pay upfront in cash. While not everyone can afford to lay down tens of thousands of dollars on a vehicle, arranging financing with a bank ahead of time can offer the same advantages.
Related: New or used – What’s your car buying approach?
With cash in hand you can turn the tables on the dealer and sit in the proverbial driver’s seat when it’s time to negotiate the price of a new vehicle.
Review the math to determine whether it’s in your best interest to accept the dealer’s zero-percent financing, or a manufacturer’s cash back rebate (in most cases it’s one or the other: zero-percent if you finance, cash-back if you pay upfront).
Is 0% Financing When Buying A Car Too Good To Be True?:
Car expert Mark Whinton, a certified mechanic with over 34 years experience, says that car financing through manufacturers like GM and Ford can be a great deal but beware of the fine print.
“Watch they don’t give you a zero rate that has extra payments in it, or tack on a $1500 administration fee. One way or the other there is no free lunch,” says Whinton.
Here’s the bottom line when it comes to financing a vehicle from a dealer or from your bank:
The car dealer is likely go above and beyond to get you to buy a vehicle and that means you have a better chance to be approved for a loan. The dealer has all the incentives at their disposal, from their own financing for higher risk borrowers, to factory incentives like cash-back rebates and zero (or near-zero) percent interest.
Ultimately your dealer is a one-stop shop and the fastest way to get financing for your vehicle purchase.
Beware that the high-pressure environment of a car dealership might lead to poor decisions like not reading the fine print or adding extras you don’t need.
Arranging financing in advance through a bank, on the other hand, relieves some of that pressure and can allow for the opportunity to make a more rational decision about your budget and how much car you can afford.
Rates can sometimes be lower than dealer financing, and having financing arranged ahead of time can give you the upper hand when it comes to negotiating the price of the vehicle.
It takes more time to plan ahead and work with a bank, however, and there’s always a chance the bank turns down your loan application.
My car-buying checklist:
- Negotiate the price of the vehicle before discussing financing terms
- Be prepared to pay in cash or have previously arranged financing in place
- If financing, don’t take more than a four-year term. If you have to stretch your payments over six, seven, or even eight years, you can’t afford the car
What are your thoughts on financing a vehicle?
For the past two years we’ve celebrated Canada Day in Waterton Lakes National Park, the crown jewel of southwestern Alberta. Entry to the park was free last year for Canada’s 150th birthday, which brought an unprecedented number of visitors to the area. Unfortunately, Waterton was hit hard by the devastating Kenow wildfire last September, a 380 square kilometre blaze that affected more than one third of park and about half its vegetation.
Parks Canada has worked hard to reopen the park and repair much of the damaged infrastructure, but the primary campgrounds and trails remain off limits to visitors. Despite many closures, the park is expected to be busy once again for Canada Day festivities. We hope to return to Waterton soon (maybe not on a long weekend) and see how the park is recovering from one of the most destructive wildfires to ever hit the area.
We’ve opted instead for a family barbecue and then we’ll take in the local Canada Day fireworks show on Sunday night. Then we’re off to Vancouver Island later in the week for our summer vacation.
What are your plans for Canada Day?
This Week’s Recap:
On Wednesday I wrote about Vanguard’s entrance into the Canadian mutual fund market with four actively managed funds.
On Friday I shared my mid-year net worth update for 2018.
Over on Rewards Cards Canada I gave readers three credit card options to save on foreign currency conversion fees.
I also shared American Express’ long-awaited refresh to its Starwood Preferred Guest Credit Card after the SPG program combined with Marriott rewards.
Finally, in my Toronto Star column I compared Orangetheory Fitness vs. 9Round Fitness in a battle of the boutique fitness studios.
Promo of the Week:
A few months back I reviewed Willful Wills, the new Canadian digital platform where you can create a legal online will in 20 minutes for as little as $99. They’ve worked with experienced estate lawyers to build the most comprehensive online estate planning service available in Canada.
At the time of launch, Willful was only available for residents of Ontario. This week, they’ve expanded service to residents of Alberta, and they hope to launch soon in British Columbia.
Create your own will online today and get 10% off your purchase when you enter the promo code: Boomer.
Weekend Reading:
Michael Drak, author of Victory Lap Retirement, says there’s more to retirement than financial planning.
How much money do you save by cooking at home? A lot, according to this in-depth Priceonomics article.
“We found on average, it is almost five times more expensive to order delivery from a restaurant than it is to cook at home. And if you’re using a meal kit service as a shortcut to a home cooked meal, it’s a bit more affordable, but still almost three times as expensive as cooking from scratch.”
NASA can calculate the dimensions of the orbit of the moon to within a fraction of a mile. Finance, on the other hand, requires us to be comfortable with inexact calculations, relationships, and human emotions.
Here’s some terrific little money rules by Collaborative Fund’s Morgan Housel.
Some of the best investment minds today also write their own popular blogs. Prag Cap’s Cullen Roche is one of them, and he explains here how blogging changed Wall Street.
Here’s Nobel laureate Daniel Kahneman on four keys to making better decisions:
“People are very loss averse and very optimistic. They work against each other,” he said. “People, because they are optimistic, they don’t realize how bad the odds are.”
Nick Maggiulli (Of Dollars and Data) explains how to fight back against your own confirmation bias.
Rob Carrick discusses where pension plans are investing money these days with Jeff Gray, Vice-president of Proteus:
Ben Felix explains why the 4 percent spending rule doesn’t apply to those seeking FIRE (Financial Independence / Retire Early).
The Blunt Bean Counter Mark Goodfield explores the taboo of asking for money within a family.
Feel like life is built for two incomes? Here are 4 single-person money-saving tips from Worry Free Money author Shannon Lee Simmons.
Her husband died at 34. Here’s 40 life lessons she’s learned from it:
None of the wealth accumulated is buried with you. Not the money, the house, the car, or the prestige. Your title at work does not go on your tombstone. When the nurses gave me my husband’s personal effects that night in the hospital in a white plastic bag, it really dawned on me, all of this is temporary. The only thing that counts is the positive impact we make in other people’s lives.”
Rob Carrick must be a glutton for punishment to post this: You hated the idea of starting CPP at 70. Now, how about 75?
Tim Cestnick explains how the tax exemption on your residence works.
A grade 11 math teacher in Ontario created a wonderful personal finance course for her students. Check it out here.
Bitcoin is down 70 percent from its December highs, while many other coins have gone to zero as the cryptocurrency fad starts to fade away.
Kristen Lee’s job is to stop celebrities from blowing all their money:
“I’ve had clients fight me when I say that they can’t afford something. In those cases, I will insist that they put it in writing. I will ask them to email me so that I can write back to say that I think their decision is unwise, because I’ve got to cover myself. I don’t want to end up being in the news, like, “My business manager let me spend all of my money,” when I didn’t.”
Afraid to disconnect from work while you’re home or on vacation? Here’s why you should get over it.
Finally, financial ‘predator’ Daniel P. Reeve gets the longest fraud sentence ever in Canada — 14 years. The former Waterloo Region financial adviser fleeced 41 people out of $10 million.
Have a great Canada Day long weekend, everyone!
It’s the end of June and that means it’s time to check in on our financial progress for the year and update our net worth statement. At the end of 2017 I shared our household net worth had reached $635,000+ and that our goal is to reach $750,000 by the end of 2018. The bigger picture objective is to hit the million-dollar mark by the end of 2020, and then become financially free (day job optional) by 2024.
The stock market has been a roller coaster so far this year but our investments have grown at a modest 3.9 percent clip. I maxed out my RRSP contribution limit prior to the deadline this year and now, due to the pension adjustment, have just $3,600 in annual contribution room going forward. I make this automatic by contributing $300 per month on pay day.
With plenty of room available on the TFSA side we continue to make TFSA contributions a priority and put $1,000 per month into this tax-free shelter. It’s gratifying to see our balance grow into something approaching respectability (for a personal finance blogger!).
We max out our RESP contributions for our two kids (now ages 9 and 6) by setting aside $416.66 per month and investing it in TD’s e-Series funds.
How do we maintain such a high savings rate? We’re not the most frugal family in the neighborhood, but we do have two paid-off vehicles and no desire to replace them anytime soon. And while my salary remains frozen until at least September 2019 (applies to all non-bargaining public sector staff in Alberta), we find creative ways to increase our income through freelance writing, credit card rewards, and by selling the odd item on Facebook or Kijiji. We spend on things we enjoy; like good, healthy food, wine, and travel.
Could we tighten our belts and reach our savings goals faster? Sure, but we prefer to enjoy the journey and strike the right balance between enjoying life today and saving for tomorrow. I think we’ll still get there faster than most people would ever dream.
Here’s a look at the numbers:
Net worth update: 2018 mid-year review
Total Assets – $899,867
- Chequing account – $1,500
- Savings account – $12,500
- RRSP – $174,265
- Defined benefit pension plan – $186,816
- TFSA – $27,113
- RESP – $38,673
- Principal residence – $459,000
Total Liabilities – $219,440
- Mortgage – $219,440
Home equity line of credit – $0
Net worth – $680,427
Now let’s answer a few questions about the way I calculate net worth:
Credit Cards & Banking
We funnel all of our purchases onto a couple of different rewards credit cards to earn points on our everyday spending.
Our go-to card is the now discontinued Capital One Aspire Travel World Elite MasterCard. We have a grandfathered version that pays 2 percent back on every purchase and comes with a 10,000-point bonus each year. Our secondary card is the new American Express Cobalt Card, which pays 5 percent back on ‘eats & drinks’ so we use it at any grocery store, restaurant, and liquor store that accepts Amex.
We each have no-fee chequing accounts at Tangerine, which we use for bill payments, email money transfers, and the odd debit purchase.
The rest of our banking is done at TD, including our mortgage, line of credit, and investments.
Pension
Each month I contribute roughly 12 percent of my salary to a defined benefit pension plan that my employer also matches. The amount listed above is the estimated commuted value of the pension if I were to leave the plan today.
The plan pays 2 percent of your highest average salary multiplied by the number of years worked. So that means if I retired at 60 with an average salary of $100,000 I’d receive $60,000 per year from the pension plan.
RRSP / RESP
The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.
My preferred method is to list the current value of my RRSP and RESP plans rather than discounting their future value to account for taxes and distributions.
I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP and distribute the RESP to my kids, net worth will decrease accordingly.
Principal Residence
We bought our home in 2011 and even though the real-estate market has gone up I had typically listed its value at purchase price. I’ve since factored our basement development into the equation and increased our home value by $25,000. Last year I bumped up the value by 2 percent (which is still less than its city-assessed value).
Final thoughts
I must admit it’s incredibly motivating to watch our net worth grow and to see just how close we are to reaching the million dollar milestone. Our finances are humming along now on auto-pilot and we’re maxing out all of our available tax-shelters. I’m even looking forward to the next stock market crash as an opportunity to put a big chunk of money to work at a discount.
We’ll keep plugging away for the next six months and see if we can get our net worth up to 3/4 of a million by the end of the year.
How are your finances shaping up for 2018?