Getting up to Speed\nWith marketing campaigns promising zero percent financing, buying a new car is very tempting because it appears inexpensive. Surprisingly, a “semi-monthly payment of only $175” for a new car can actually cost double the promise.\nSuppose you purchased a vehicle for $25,000, financed over six years with semi-monthly payments and no interest. This will result in $175 semi-monthly payments – easily doable while earning a $50,000 salary – right? Maybe not.\nWith conservative assumptions for insurance, gas consumption, preventative maintenance, registration, winter tires (this is Canada after all) and an allowance for unexpected expenses (thank you, photo radar), it’s easy to exceed $25,000 in additional costs over the six-year financing term. That means over half of ownership costs are not accounted for when looking at the financing payment alone.\nActual vs. perceived monthly costs of car ownership\nWhat you think it costs:\n\n Monthly car payment: $350\n\nWhat it actually costs:\n\n Monthly car payment: $350\n Fuel: $117\n Insurance: $100\n Parking: $83\n Maintenance: $33\n Winter/summer tire change: $7\n Registration: $8\n Unexpected: $42\n Total: $740 ($390 in additional expenses)\n\nThe number of years over which a car payment can be financed seems to keep increasing. Six-year financing is not uncommon. Even longer terms would exacerbate this issue and cause payments to be a smaller percentage of total annual expenses, further obscuring the true cost of ownership.\nHow does this fit into your budget? After deductions, a take-home pay for a $50,000 salary is approximately $40,000 per year or $3,300 per month. Considering $350 for financing payments and $390 for other expenses, $740 of your take-home pay (more than 20 per cent!) goes to the cost of owning a car. Is this reasonable? Debateable.\nThe indisputable fact, however, is the monthly cost. Remember the “semi-monthly payment of $175” that was advertised? The original $350 per month payment that you budgeted is closer to $740, all-in. That is more than double the marketing campaign’s promise. Yikes!\nAccording to an article published by the Globe and Mail in May 2017, more than half of Canadians would struggle with an unexpected expense of more than $200 in any given month. If the cost of car ownership is $390 per month more than expected, it’s easy to see how Canadians are driving into debt.\nOverspending seems to be a current issue. Consumers are purchasing without knowing the full extent of the costs associated with these purchases. Education on basic principles, such as creating a thorough vehicle ownership budget and being conscious of overextending personal financial limits, will help to address this issue.\nMany Canadians feel that owning a car is necessary. Public transport may be inconvenient or unavailable for many, particularly those in less urban regions. Consequently, we can feel that owning a car is part of becoming self-sufficient. Many people make lifestyle choices reliant on easy access to a vehicle.\nCanadians purchase vehicles for diverse reasons. We need to ensure that conscious decisions are made which consider relevant information and available alternatives. While the financial aspect of car ownership is significant, there are other relevant factors that are discussed in our next segment: Killer driving habits.\nKeep the conversation going\nHave you taken these costs into consideration when purchasing your latest vehicle? Are there alternatives to owning a car that might make better sense for you? Post a comment below.\nDisclaimer\nThe views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.