Cars: cash vs. financing; used vs. new

Every once and awhile I think about getting a car. Cars are pretty cool if you don’t live in the city or have to travel along crumbling infrastructure (Bonus video! I spun out on this bridge in a snowstorm once. It was probably one of the scariest times of my life). Since I’m moving to Alberta in 82 days and because I’m a bit bored, I thought I’d see what cars cost these days, along with the difference between cash vs. financing and used vs. new.

The car that I have my heart set on is a Toyota Corolla (actually it’s a Honda Civic because it has that awesome odometer but I think that novelty should not come into play with a decision like buying a car). Now, I would be happy without the luxuries of air conditioning and power locks but, seeing as I’m doing a new/used comparison, I had to pick a new car with more accessories than I wanted (which means its more expensive) in order to have identical cars.

cash vs. financing

Cash vs. Financing

Toyota is having a fantastic promotion right now — 0% financing or $1 500 off. Based on the car that I selected, I could finance $19 961.30$ or pay $18 461.30 cash.

Now, I know that, as a PF blogger I should say something like “debt is evil!” but as a rational studier of economics — take the 0% financing for the maximum amount of time that it’s offered!

Do you know what financing will cost you? $0
Do you know what paying cash will cost you? $2135.92

But how can paying cash cost me money? Well, let’s assume that you suck at investing and you park your $18 461.30 in the bank and earn 3% a year. At the end of 6 years, you will have earned $3 635.92 in interest. Subtract the $1 500 you saved by using Toyota’s cash incentive program and you’ll still come out $2 135.92 ahead.

Used vs. New

The car that I chose for this comparison is a 2010 Corolla with 11 341km for $14 988. The catch is that Toyota charges 4.9% interest on a 6 year loan. In this case, the cost of financing is great than the cost of purchasing with cash (but not by much)

So let’s say that I had the choice between buying a used car or buying a new car. Obviously we will use the cheapest of the two options when comparing (I have excluded insurance costs for simplicity — the difference, $20/year, was nominal)

New (with financing): Monthly costs $277.24; total cost $19 961.30
Used (cash): Monthly costs $0; total cost (including forfeited interest at 3%/year) $17 939.86

The difference between a brand new car and a 2 year old car is only $2 021.44

Not only is the difference only $2 000 but, with a new car, you can get a nice warranty and bring the car back to the shop for the next X number of years for another $1 500-$2 000. With a used car, the warranty only covers either 3 year or 140 000 and cost $1 200-$1 500.

Personally, I would pay the extra $2 000 to get a brand new car, rather than dealing with any issues that come with having a used car. Plus I get to choose whatever colour I want.


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