The ride

After being reckless and dumb about houses, we’re very adept at failing with cars. And, why not? Same challenges. Big-ticket cost. Rising financing charges. Too much emotion.

A report from CIBC Capital Markets says auto loan delinquencies in Canada have  soared through pre-pandemic levels, “and are likely heading higher in 2023.”

It adds: “The average size of auto loan increased with higher prices, contributing to higher monthly payments for borrowers. Inflation, interest rate and economic pressures are making these higher payments harder for consumers to afford.” And the bank notes that new car prices jumped 30% since Covid hit, with used rides up 60% by the end of last year. Now, it seems, things are cooling.

In the States, this is already a huge problem. Negative equity has struck with a vengeance as people owe big wads of money on depreciated hunks of metal that are soon worth less than the debt they represent. Here’s an interesting snippet:

The build-up in negative equity  — or the amount that debt exceeds a vehicle’s value — is rattling consumers and raising alarms within the industry. Though it’s not unusual for drivers to carry negative equity, some dealers say more people are arriving at their lots up to $10,000 underwater, or “upside down,” on their trade-ins. They’re buying at still-sky-high prices and rolling debt from one car to another and even onto a third. Loans are commonly stretching to seven years.

As cars become more expensive, dealers and lenders are compensating with longer and longer financing periods. Loan terms of 72 or 96 months are common, with buyers driving away after putting little or nothing down. The problem is that your nothing-down, fully-financed $42,000 Kia Sportage may be worth $19,000 thirty-six months later, when you still owe thirty grand. By the time month 96 comes around, it could be a planter.

Gone are those fleeting pandemic-era months when a used car could be sold for more than its original sticker prices, thanks to a busted supply chain and a new inventory crisis. Used car prices have come back down to earth – but the cost of auto loans has powered ahead up. Rates at the big banks current run between 7% and almost 12%, and many lenders only want to deal with a new unit.

Of course, the bankers can’t quit. Just as folks desperately trying to get into real estate they really can’t afford are prime bank clients, so are those who desire a sweet set of wheels when they should really be on a Vespa. Eight-year loans and nothing down? Bring it on…

Some people – including all the self-made mechanics and moist, manly men who strut and preen in the steerage section – espouse buying a beater and rebuilding it to last another million klicks. But most people couldn’t change the oil, swap a battery or even know how to replace a taillight bulb if their lives depended on it. They have the right attitude. A car is a tool. It’s no investment. It sheds worth the first day you drive off in it. A breakdown would be a crisis. And costs should be contained and transparent.

Which brings us to a simple life rule: buy what appreciates, rent what depreciates.

Leasing is good option, even when dickering and using cash may result in a lower initial sticker prices. There are valid reasons…

First, you don’t burn through thirty, fifty or eighty grand buying something with cash guaranteed to be worth less in a year. Better that the funds be rifled into your RRSP to grow tax-free and reduce your taxes. Or a TFSA or joint NR account with your squeeze. In a decade, when the car is toast, your capital could have doubled.

Second, leasing is simple, easy, low-stress and non-intimidating. You drive for three years, drop it off, have a beverage and get a fresh one. The car is new. Servicing is usually included in your lease rate. Never a disaster. Always a safe and reliable ride.

Third, let the dealer worry about depreciation – not you. Leasing sets the monthly rate and establishes in advance a future value for the car. You can buy it then for that price, or just walk.

Fourth, if you’re self-employed, have a business or need your car to earn a living, it’s easier and more beneficial to write off lease costs than claim expenses on an owned vehicle. The little meanies at the CRA love nothing better than to challenge auto claims, and lease payments are a good solution.

Fifth, you can get a better ride for the same bucks. More options. Upgraded. New every three years. And lease rates can be hugely lower than loan costs. Shop around.

Vehicles are machines. They’re not your alter-ego. Don’t buy emotionally – they say nothing about you. Unless, of course, you have a jacked-up pickup, especially with balls. Then we all know.

About the picture: “This is Quinton a seal point Siamese,” writes Gord in Regina, “who has taken ownership of this wheel in my daughter’s home of three cats.  Funny how it seems kind of a territorial object.  Garth, what I find refreshing is all the comments from your readers, who have embraced your investment strategy.  My true pet peeve is all those many (not all) so-called financial planners hanging their clients with all the steam engine mutual funds. I refer to these financial planners, as their own financial planner, not their clients.”