Chapter 5: Counting The Cost

•  Financing
  
•  Taxes
  
•  Insurance
  
•  Upkeep
  

Section Introduction:

Cost is one of the most important considerations for most of us when buying a vehicle. The mistake people make is failing to count the cost of the secondary financial considerations that affect the affordability of a vehicle. These considerations include financing, taxation, insurance and upkeep and they can quickly turn a good purchase into a bad deal. What seemed affordable when you signed on the dotted line can quickly become too expensive when these secondary financial considerations are combined into the equation.

Read this chapter for a look at the issues of financing, taxes, insurance and upkeep

Financing

Know the cost of financing precisely and don't let it become intertwined with the price of the vehicle. It is a perfect tool for the salesperson to use when trying to blur the price issue.

•  Watch out for low monthly payments. Low monthly lease payments or low monthly loan payments usually hide higher actual costs over the long-term. With a lease this can mean bigger lump-sum fees before or after or a small mileage allowance. With a loan this can mean a longer-term loan and a larger amount of debt servicing.
  
  
•  Find out the interest rate-this is the true price of any loan. Get on the phone and find out which banks are offering the most competitive auto loan interest rates and don't forget the potential value of Credit Unions. If you are or can become a member of a Credit Union, you may be in a position to obtain a better interest rate from them than you can from a bank. The banks in turn, are usually more competitive than dealership financing. Again though, this is an instance where knowledge will get you the best deal. Shop around so that you know you are getting the best deal on financing.
  
  
•  Make sure to double-check for hidden fees or restrictions in your hunt for the best interest rates. Ask the bank's auto-loan representative to confirm that there are NO extra fees or payments that may be incurred beyond those rates you are being quoted.
  
  
•  Keep in mind the fact that borrowing costs money. Borrowing less is always the best strategy if you want to reduce your monthly payments and lower costs over the long-term. Buy a cheaper vehicle or make a bigger down payment.
  
  
•  The convenience of financing through the dealership usually costs money both because of higher interest rates and buyer confusion. By mixing the details of the car purchase and the money purchase, the dealer has an added opportunity to cloud your understanding of what is costing what. This will undermine your ability to negotiate for the best price.
  

Taxes:

Consider the tax benefits of leasing for business vehicles

•  With a leased vehicle it is often possible to deduct more over time than it is for an owned vehicle. According to some tax systems you can deduct a portion of the lease payments equal to that portion of the vehicle usage that is for business.
  
  
•  For example, if you use the vehicle for business 75% of the time, and your payments are $400/month, you can deduct $300/per month from your taxable income.
  

With an owned vehicle, the deduction is a function of depreciation and it may be less overall than with a leased vehicle because of a limit on total amount you can deduct.

•  For example, a $40,000 car may have a cap of $14,500 on the total amount of depreciation over five years, a total deduction of $240/month. Leasing that same vehicle, according to the $300/month example above, would equal a total deduction of $18,000 over the same period, a difference of $3,500.
  

Note: It is important to review the current tax rules specific to your business and location regarding deductions for business vehicles.

Insurance:

Vehicle insurance can be a substantial portion of your total vehicle cost. Don't underestimate the impact of this expense when deciding what vehicle you can afford and remember that it can go up.

•  Don't choose an absolute basic insurance plan and leave yourself with only pennies leftover after paying for everything. A minor accident or a ticket can cause your rates to rise substantially.
  

Consider the potentially significant impact vehicle choice can have on your insurance rates due to differences in safety and theft ratings.

•  Get an insurance estimate when you have a vehicle in mind to buy.
  
•  Lists are compiled showing the annual insurance rankings of vehicles.
  

Protect yourself with gap insurance coverage for a leased vehicle. Gap insurance is often obtainable as a dealer add-on and it will cover the full cost of the balance of the lease that you owe.

• Regular insurance may only cover the depreciated market value of the vehicle that you are leasing and you could be left with a substantial amount leftover, depending on the nature of your lease arrangement.

Remember that monthly insurance payments cost extra.

• If you can pay your insurance in a lump sum you will save money by avoiding the extra charges and interest inherent in a monthly payment plan.

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