Are luxury cars an unaffordable luxury for Canadians?Sep 26, 2016
For many Canadians, a house and a car are the two largest purchases they’ll make in their lifetimes, which often require taking on debt. Right now, Canadian household debt is at an all-time high, with the average Canadian owing $1.68 for every dollar they earn. And while we keep hearing about the rise in house prices and its effect on Canadians’ debt loads, a recent report on luxury car sales suggests that some Canadians could be buying too much car, as opposed to too much house.
In Toronto’s financial district, an ad for a new German luxury car lists the starting price at over 99-thousand dollars. You wouldn’t expect such a high MSRP to be a selling point—not even on Bay Street—but it seems more and more Canadians are buying luxury cars these days. A BMO economist found that sales of vehicles with a starting price above $90K have increased by 37 per cent since 2013. What’s more, these cars have seen an increase in sales every year since then, despite a recent economic downturn in some provinces.
Another auto analyst says sales of Audis, BMWs, Mercedes-Benz and Porches are all up at least seven per cent over last year—after the national auto loan delinquency rate hit a four-year high at the end of 2015. It’s important to note that the people buying luxury cars are not necessarily the same ones defaulting on their loans; however, it can reasonably be assumed that those who purchase $90K vehicles have longer loans and/or larger monthly payments to keep up, which can increase the risk of falling behind on payments.
Why car loans are considered bad debt
Although a car is often a necessary purchase—you need one to get to and from work, for instance—it would almost always be considered a form of bad debt. The difference between good debt and bad debt is that good debt gives you a return on your money, whereas bad debt is spent on something that loses its value over time. And when it comes to a new vehicle purchase, that car loses value as soon as you drive it off the lot. It is not unusual for a new car to lose 15 to 20 per cent of its value a year simply through depreciation.
On the other hand, buying a house is considered a good form of debt, since, barring any housing market crashes, it typically appreciates in value over time. While you might stand to make a tidy profit by selling your home 10 years from now, you’d be lucky to receive any sum of money in return for a 10-year-old car.
Why to buy a (newer) used car
Considering that a car loses up to 20 per cent of its value every year, it’s not unusual to see a used car that was brand-new three years ago selling for roughly half the price of a similar new model. But if you buy used, you might end up paying more in maintenance costs; one auto website suggests reducing your car budget by one or two thousand and setting that money aside for short-term repairs.
While you might be less likely to get a 0 per cent financing offer when buying a used car, the lower price should make it easier to pay for the full cost of the vehicle up front, avoiding a car loan—and additional debt—altogether. Plus, if the vehicle is around three years old, it likely still has some warranty coverage (depending on its mileage), which could cover the cost of some repairs. Ultimately, if the car is in good shape, buying a newer used car should be the most reliable, affordable option.
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