By Nicole Nemeth
For young adults, nothing smells quite like freedom like a new car. But, can most really afford to buy one?
According to Angela Gee, a Bank of Montreal branch manager, it all comes down to the buyer’s debt ratio.
Finding your debt ratio is easier than it sounds. You can easily find a debt ratio calculator online or you can do the calculation yourself. To calculate your debt ratio you first add up all of your monthly payments: rent, credit card bills, loan payments, insurance, cellphone bills, etc. After you come up with a total you divide that number by your total monthly income and that will give you a percentage which is your debt ratio.
“You never want your debt ratio to be over 40 per cent – the lower it is the better,” Gee said.
According to Gee it’s not so much the price of a new car but the monthly payments that are the most important factor when considering if you can afford it.
“If you have a $20,000 car loan and pay it over five years at five per cent your monthly car payments will be $353 … Most bank sites have calculators you can use to find out your monthly car payment amount,” she said.
When calculating your debt ratio to find out if you can afford your car payments, it’s important to add the estimated amount the monthly car payments will be to the total monthly expenses amount before dividing it with a person’s monthly income to ensure it’s still below the 40 per cent mark.
There other things to consider as well during the hunt for a new car such as interest rates.
“Dealerships have better interest rates than banks do because they have to be more competitive. You can get really low interest rates like three per cent or five per cent, but it can also go up to 13 per cent,” Gee said.
First-time buyers are considered higher risk because they haven’t established a mature credit rating yet and that may affect the interest rate, especially when purchasing a used car at a dealership through a loan.
According to Gee, “Used car interest rates depend on your credit rating. If you’re a new buyer you would be considered a higher risk and have a higher interest rate.”
Although buying a used car could be a lot cheaper than a new one, buying a used car with a loan can cause other problems.
“If you’re buying a used car and want a bank loan, it (the car) will be held for security, but we’re not going to take a car that’s 10 years old for security. Therefore, you would want to find a car no older than six years old when purchasing it used. Otherwise, once the car is old it’s not considered a car loan but a personal loan.”
Buying used has other downsides as well.
Older cars usually require more maintenance and work done to them. While some older cars can continue to run smoothly for a long time, it’s not uncommon for someone who’s purchased a used car to end up paying thousands of dollars in unexpected repairs.
According to Trevor Miller, head mechanic and owner of TTM Motors in Kitchener, there are certain questions every buyer should ask the seller when looking to purchase a used car.
“Has it passed a safety and emissions test? How long have you owned the car? Do you know much about the history of the car? Has it been in an accident? Which garage do you take it to? Who worked on it last? Have you made any modifications or upgrades? What’s the mileage on it?” Miller said.
Gee also recommends that when someone is looking to buy a car that they do not submit an application until they are sure it is the car they want.
“When you go to several dealerships make sure they’re not doing credit checks at every one. It can hurt your credit rating.”
In the end, whether you choose to buy a new car or a used car, there are many things to consider, but the most important factor all comes down to money and what you can afford.
“Really, when purchasing a car, whether it’s used or new, buyers need to understand the monthly payments and the commitment that comes with a car. Even if someone does get approved, they should make sure they will continue to be able to afford it for however long the payment plan is for,” Gee said.