The Canadian Automobile Association (CAA) has a Driving Costs Calculator you can use to calculate your individual cost of driving. Total costs vary depending on where you live and the type of vehicle you own. For 2020, an approximate cross-Canada average, annual driving cost of a new mid-sized car (such as the Honda Civic) was $7,551 based on 20,000 kilometres of driving. Costs included fuel, insurance, licensing, registration, depreciation, and maintenance.
Given the cost, it makes sense to shop around, do your homework and look for ways to save money. In addition, how you pay for your car has a lot to do with how much your total cost is and how payments affect your cash flow.
The best way to purchase a car is with cash because buying with cash can save you hundreds of dollars in interest payments. If you set aside monthly car payments in a vehicle replacement fund, then you’ll have cash for when you buy your next car. However, buying with cash is impractical for most, especially with your first car. The two most popular methods of purchasing a car are financing or leasing.
Consider the following:
How many vehicles will you own in a lifetime or until you have your driver’s licence taken away? After your house, your vehicle may be your most expensive asset but it depreciates to a fraction of what you paid for it.
Are you planning to keep a car for ten years or longer? If so, you could save a lot of money on the cost of vehicles over a lifetime. Consider a $30,000 vehicle owned for five, ten or fifteen years. The average cost per year is $30,000 divided by the number of years owned. That’s $3000 per year if you own it for ten years, dropping down to $2,000 over fifteen years and increasing to $6,000 per year over five years.
Financing a car is simply buying on credit. You borrow enough money to purchase the car and make monthly payments to repay the loan with interest. Eventually, you pay back your loan and the car is yours.
Leasing a car is more like renting a car. With a down payment and a monthly charge, you take possession of the car for a set period of time. There may be restrictions on how much you can drive and what kinds of insurance you are required to carry on the car. When the lease is over, you return the car. There is no trade-in value for the car because you don’t own the car. At the end of the lease, you have nothing.
If you enter into a car lease, be sure you’re aware of all the terms. All leases limit the mileage you can put on the car during the lease. You can, for example, choose 12,000, 18,000, 24,000 or unlimited kilometres per year; however, each of these options gets progressively more expensive.
If the charge for exceeding your mileage is 25 cents per kilometre and you are 4,000 kilometres over your kilometre restriction at the end of your lease, it adds up to $1,000. If your lease is open-ended, you may be required to make payments to the car dealer if they don't think the car is worth what they estimated it would be when the lease is finished; the value of the car can also be affected by a depressed market due to economic conditions or damage to the car.
A closed-end lease avoids these problems but it’s generally a little more expensive.