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How Much Can I Afford?

You've got your eye on a new vehicle but think you might have to settle for something a little less extravagant. Don't worry. The perfect one is out there for you. Before you make your decision, consider how a major purchase like a car, boat or RV will fit into your overall financial plan, and how it might impact your other financial goals.

Once you've established an overall price range, it's time to consider how you're going to pay for your new acquisition. If you don't need a vehicle immediately, you may be able to save enough to cover the down payment or even the full purchase price. If your need is more pressing, taking out a loan or personal line of credit may be the solution. Leasing a vehicle is yet another alternative to consider.

BMO's Major Purchase Savings Calculator is an easy way to prepare for big expenses.

When calculating cost, what additional expenses should I account for?
  • Insurance
    Costs can vary widely from one vehicle to another based on repair history, safety ratings and probability of being stolen or involved in an accident.

  • Fuel
    Check the manual and online consumer reports for expected fuel consumption.

  • Maintenance
    Look into the maintenance plan and the comparative cost of repairs after the warranty runs out.
Should I Buy New?

One of the biggest drawbacks to buying a new vehicle is that the initial purchase price is so much higher. But is it worth it? Consider these pros and cons when making your decision:

Pros Cons
You're covered by a full warranty—often for three or more years—which lowers your maintenance costs for this period. The cost of a new vehicle is considerably higher than a used version of the same model.
You have no concerns about how well the vehicle has been treated. The cost of insurance is generally higher for a new vehicle.
You can enjoy that new vehicle smell! The greatest amount of depreciation in the life of your vehicle occurs when you drive off the lot. It continues at a rate of 15% to 20% per year.
How should I pay for it?

Cash Purchase

The ideal way to purchase a depreciating asset like a car is to save as much as possible to minimize the amount you borrow and pay interest on.

A Tax Free Savings Account offers an ideal way to set aside funds over a few years to cover a down payment or even a complete purchase. Make sure to choose safe, secure investments so that the money will be there when it comes time to make your purchase.

Borrow to Purchase

With the cost of vehicles today, many feel they have to borrow to cover at least part of the purchase. If that's your situation, you have a few options:

  • Apply for a loan
    Many people find it easier to budget for a fixed monthly payment. The best way to minimize the interest you pay is with fixed payments amortized over the shortest time period you can afford. It is true that a shorter amortization period results in higher monthly payments, but you'll pay less over the life of the loan. For example, a $50,000 loan amortized over three years at 5% results in a total interest cost of $3,906. The same loan amortized over five years will cost $6,543 in interest. Check out the BMO loan calculator to run through the numbers.
  • Use a personal line of credit
    With a BMO credit line, you have the flexibility to decide how much to pay down each month, and larger payments can be made from time to time to pay off the loan faster than a fixed-term loan. This option can be a good choice for those who receive irregular income such as bonuses, commissions or dividends, but discipline is the key to making it work.
Instead of financing, you might consider selling non-registered investments to buy your vehicle outright, then borrowing money to repurchase the investments. Unlike borrowing for personal purchases, borrowing to invest is tax-deductible.

Know your financial options and risks when it comes to financing a car. Learn more at the Financial Consumer Agency of Canada.

What about Leasing?

Leasing is yet another alternative to consider. As with any decision, there are pros and cons for leasing too. Consider this list when you're weighing the options.

Pros Cons
Monthly payments are typically lower than loan payments. Leasing and trading-in every few years is more costly than buying and keeping a vehicle for many years.
You have the chance to drive a new vehicle every few years. If you exceed a fixed number of kilometres per year, you may be liable for extra charges.
Warranty coverage is maintained, so you have less concern about maintenance costs. If you have to terminate the lease early, you will have to pay hefty fees.

The process of making a major purchase can be daunting, but armed with the right knowledge you can get what you want. Financial planning requires setting priorities among various goals. You might decide to choose a less expensive vehicle so you can also set some money aside for an annual vacation. Your BMO financial planner* can help you look at the big picture and make the right decision based on your goals. Click BMO's Major Purchase calculator now to start researching how much you can afford.

We'll help you find the right option. Connect with us today.

  • For personal financing
  • Ontario: 1-800-227-9236
  • Quebec: 1-800-363-8006
  • For commercial financing
  • Ontario: 416-643-4224
  • Quebec: 514-877-6734

* BMO financial planner refers to Financial Planners, Investment and Retirement Planning that are representatives of BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal.

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