Posted at 6:00 AM
1. Happy cash payment
In times of high interest rates, cash purchases should not be neglected, especially if funds can be used that would provide modest returns.
Giving up a 3% return to avoid a 7% loan? The savings equates to a net return of 4%.
Moreover, this equates to a safe return! “Not paying interest, that’s pretty much certain!” David Poliquin, portfolio manager at BGY, Integrated Financial Services Inc. , with good humor during a conference call with colleagues Marc-André Vachon and Vincent Bouchard.
“When a person already has investments, already has assets, or already has a lower-cost borrowing capacity, buying without merchant financing can be a very serious option. In fact, we have been recommending it a lot to our clients in recent months.”
2. Long-term possession
“For someone who wants to keep their car for the long haul, now and always, buying remains the solution that will save the most money in the long run,” says Jesse Caron, CAA-Quebec automotive expert.
Under the present circumstances, one might be tempted to opt for leasing with the sole aim of reselling the vehicle at a profit at the end of the lease term.
“But who knows if the values will be preserved within four years? For someone who buys his car to keep for a long time, buying remains the best solution. »
However, the problem can be posed in another way.
3. Leasing: Another financing option
Don’t be fooled by appearances: financed purchase and lease debt.
In fact, rent is equivalent to taking out a loan that is repaid over 80 to 90 months, but must be re-subjected, refinanced or resold after 36 or 48 months.
For a Subaru Crosstrek rental of $31,117, at a rate of 3.99%, the monthly payment is set at $402 (before taxes) for 48 months.
At this rate and on the same terms, the standard loan will be fully paid off in about 88 months. After 48 months, the balance on this loan will be approximately $15,000. According to data from the merchant’s website, the residual value at the end of the 48-month lease is set at $15,096. Please note that GST and GST will be added to the refund amount.
“Leasing is a lot like financing in the form of a mortgage,” Marc-Andre Vachon describes. With the mortgage, I still have debt to refinance after the five-year period. The same for a rental car. »
4. Residual value game
“The residual value is determined by the manufacturer according to the contract mileage, term and position in the market,” BGY experts defined.
Should we worry about a fixed residual value or a higher refund value due to the current flea market? At similar interest rates, higher cash value means that monthly payments will be lower during the lease term, notes Marc-Andre-Vachon. Of course, the repurchase value to be financed will be greater, but if the market value, at the end of the lease, is less than the residual value, then nothing prevents the customer from returning the vehicle. In the opposite case, he will be able to benefit from a higher market value.
5. The critical point: the interest rate
David Poliquin notes that “the interest rate is going to be a very key component of the equation, and perhaps the most important one.”
The tax issue adds a superficial layer of complexity to this dilemma. When renting, taxes are added to the monthly payments, while when buying, they are included in the financed amount. In short, we either pay interest on taxes, or we pay taxes on interest! David Poliquin laughs.
But in the end, the low interest rate usually dictates the choice between buying and renting.
CAA-Quebec agrees with that analysis…as long as we maintain good budget discipline, says Jesse Caron.
“In fact, leasing can be attractive if the interest rate is lower than the financing rate,” he says. But you have to be careful because some people can take advantage of this low interest rate to maximize the monthly payment, saying to themselves: I have a budget of $600, I’m going to $600 for the lease. And buy a car more expensive than expected.
6. The question of the second chapter
In terms of interest, however, the uncertainty relates to the “second term” of the lease. At the time of acquisition, it is not generally known under what conditions the cash value will be financed. With the purchase financing over a longer period, the interest rate uncertainty is resolved.
“This is an item that could be a plus for purchase,” David Poliquin admits.
However, the interest rate at the beginning of the holding remains a determining factor, while the amount of debt is at its peak. The principle is as follows: the near benefit is better than the far benefit.
At the time of the initial transaction, when the rental price is appropriate, we can consider this option more calmly if we expect that the financing of the second term can be carried out under the auspices of a mortgage loan at an affordable rate or any other means on low-cost financing, as Marc-Andre Vachon emphasizes.
7. Advance Agreement
Whether it is for purchase or rent, there is a good chance that the desired car will not be delivered for several months. If there is a model year change in the meantime, the price of the car may have gone up at the time of delivery. The terms of the financing or lease – the interest rate, the redemption value – may also have changed.
“We don’t want to sign the sales contract before we receive the car, even if the dealer is pressuring us to do so,” recommends Jesse Caron.
Instead, we will sign a pre-agreement in which the price will be set, a matter of “we don’t find ourselves overpaying in relation to market conditions that may have changed when we receive the vehicle”.
8. Non-financial interest
“You have to understand that when you buy a car, you have to consider both options, and often this is a very calculative decision,” says David Poliquin. But basically, leasing has many advantages over buying. »
So much so that at similar interest rates, BGY experts tend to favor leasing.
One of the most important advantages is the possibility of returning the keys at the end of the lease.
“It’s not an obligation,” he continues. It is a possibility, a choice. Having a choice is always a good thing. »
The customer retains the option of returning the vehicle, keeping it, reselling it or transferring the lease, depending on whether the cash value is above market value. In short, he has a latitude.
9. Guarantee gap
A truck driver did not see your car and hit it. It remains only modern sculpture. Unfortunately, if the compensation paid by the insurance company is less than the loan balance, you will have to pay the difference (unless, of course, you have an endorsement of the replacement cost).
This does not have to be a concern with leasing. In the event of a complete loss, the monthly payments stop and the gap guarantee clears you of all negative accounts.
This is also a reason not to pay a cash deposit when renting.
“If the debt is greater than the fair market value of the car at the time of the accident, the cash you initially placed on the car disappears at the same time as the debt,” says Vincent Bouchard.
10. Security Deposit
However, there is another way to pay a contribution to the rent.
The guarantee or security deposit does not reduce the amount of the debt. It will be returned at the end of the rental. It will not disappear in the event of an accident with a complete loss.
This contribution “does not lower the amount on which interest is charged, but rather lowers the overall rental rate of interest. This is often very interesting,” notes David Poliquin. “We perform this analysis regularly for our clients. Usually, when you put one dollar on it, that dollar has the equivalent of a return of 6-12%. »
“Generally, at equal rates, we prioritize a lease over a financed purchase, because there is a possibility to return the vehicle at the end of the term, there is a security deposit option and there is a ‘gap’ guarantee,” conclude our experts.
11. Exception from incorporation
One final point: the problem of buying or renting appears differently for people whose businesses have been incorporated.
“On incorporation, there are many tax elements that come into play, whether the car is used for professional purposes or not! David Boliquin confirms. We do the calculations, and in most cases we recommend renting.”
12. Electrical enclosure
You are considering a new electric car. Should rapid advances in technology encourage you to prefer renting, fearing that the car will become obsolete after a long time?
That concern does not go into the decision, if we believe Simon-Pierre Rioux, president of the Electric Vehicle Association of Quebec (AVEQ), with whom we have established contact.
“In Quebec, 93% of electric vehicle owners have purchased the vehicle,” he notes. You can be sure that people have done their accounts. »
He himself had this fear when he bought his first electric car in 2013.
“Have the vehicles lost their value? Not at all, because there is a huge demand for low-range used electric cars, simply because people wanted to use them for their shopping and their daily routine.”
The problem appears less in 2022 when the autonomy of many models exceeds 400 km. These vehicles will not lose their value. »
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