Some of the most common vehicle-related questions I receive are about buying new vs old, leasing vs owning, or purchasing outright vs getting a car loan. These questions matter, but it isn’t really where it all starts.
It is important to remember that even though a vehicle is technically an asset because it has resale value, it acts more like an expense. It depreciates and requires ongoing spending.
Yet, of course, transportation is still extremely valuable because it is how most of us get to work, and your human capital (your earning capacity), is often your greatest asset.
However, if transportation were the only thing that mattered when buying a vehicle, we would all drive cheap thirty-year-old Mercury police cars until they died, and then buy another one. But that is not what most people do.
Vehicles also reflect comfort, convenience, safety, and sometimes status. That’s just the truth.
Once we recognize that, the real question becomes not simply what car to buy, but why we want it in the first place.
What Your Vehicle Says About Your Priorities
Once we recognize that a vehicle decision involves more than transportation, the next question becomes simple:
What actually matters to you?
Our genuine preferences often become clearer when we look at our past behaviour. Two useful places to look are your calendar and your spending.
What did you spend your real time on?
What did you spend your real money on?
This information tends to reveal priorities more honestly than intentions.
Our priorities show up when deciding on a vehicle, too.
That is why it is so important to understand how much that priority matters relative to everything else before you visit a dealership.
Because buying a vehicle is not an isolated decision, it should fit within the context of your other financial goals.
For someone with few financial constraints, spending more on a vehicle may not meaningfully affect long-term plans. For someone with tighter finances, the same decision could crowd out more important goals.
Understanding your priorities is the first step. The next step is seeing how those priorities fit within the limits of your budget.
The Reality of Trade-Offs
Once you know what matters to you, the next step is seeing what your budget allows.
We all live with scarcity. There is only so much money and time.
That means most big purchases come with trade-offs.
When buying a vehicle, it helps to zoom out and revisit your broader goals. Saving for the future, supporting a family, or spending in other areas of life may all compete for the same dollars.
You go from asking, Can I afford this vehicle? to What am I giving up to make this choice?
If you choose a more expensive vehicle, what does that mean for everything else? Are you comfortable with that trade?
To quote Thomas Sowell, “There are no solutions, only trade-offs.”
Which is to say there are no universal right or wrong answers, only decisions you can live with.
However, when my clients are making major financial decisions like this one, I encourage them to ensure the new obligation fits within their means and does not come at the expense of the goals that matter most.
Once the trade-offs are clear, the technical questions become easier to answer.
New vs. Used
There is no universal right answer here. A new vehicle gives you a warranty, a clean history, and fewer unknowns. A used vehicle usually offers a more budget-friendly price, but you give up some of those benefits.
One simple way to start comparing the two is the price per kilometre rule.
The formula is straightforward:
Vehicle price ÷ expected remaining kilometres
As a rough rule of thumb, you might assume a vehicle has a useful life of about 300,000 km.
So, on a new vehicle, you divide the purchase price by 300,000. On a used vehicle, you subtract the current kilometres from 300,000 and divide the price by what is left.
For example, if a new Toyota Corolla costs $30,000, that works out to about 10 cents per km.
If a 2017 Toyota Corolla costs $16,000 and has 155,000 km, that leaves about 145,000 km remaining. That works out to about 11 cents per km.
That is the opposite of what you would hope to see. There should usually be a premium on the added protection of buying new. In other words, a new vehicle should cost more per kilometre because you are taking fewer risks. If a used vehicle costs the same per kilometre, or more, it may not be as good a deal as it first appears.
That is what makes this rule of thumb helpful. If the used vehicle costs about the same per km as the new one, you may be taking on more unknowns and giving up the warranty without getting much of a pricing advantage.
That does not automatically make the used vehicle a bad choice. But it is reason for pause.
I used a new vs. used example, but this rule of thumb can also be very useful when comparing used vehicles with each other.
It is not perfect (some vehicles last longer or are more reliable than others etc.) but it is a useful place to start.
Financing vs. Purchasing Outright
Another extremely useful concept in vehicle purchasing is opportunity cost.
Put simply, opportunity cost is what you give up when you choose one option over another.
If you use cash to buy a vehicle outright, the opportunity cost is what that cash could have done somewhere else. If you take a car loan instead, the opportunity cost is the interest you will pay.
This becomes especially useful when deciding whether to:
- pay cash
- finance
- or choose something in between with a down payment
Let’s keep it simple.
Say you have $10,000 in cash, and the vehicle you want costs $10,000. A dealership offers you a 5-year car loan at 4%.
If you use your cash to buy the vehicle outright, you avoid the loan entirely. In this example, that saves you about $1,050 of interest over 5 years.
So that is one side of the comparison: using your cash earns you a guaranteed 4% return, because every dollar you use to avoid the loan saves you 4% in borrowing cost.
Now consider the other side.
If you invested the $10,000 and it grew at 8% per year, it could, not guaranteed, grow to about $14,690 over 5 years. That is growth of about $4,690.
So the trade-off looks like this:
- Pay cash: save about $1,050 in loan interest
- Invest instead: potentially earn about $4,690 in growth
On paper, the investment comes out ahead.
But this is where real life matters: the 4% loan savings is guaranteed. The 8% investment return is not. Markets may do better, or worse, over that period.
That is why a helpful rule of thumb is this:
Compare the loan interest rate to the return you reasonably expect on your money, with risk in mind.
If the loan rate is high, paying it down is often the better move. If the loan rate is relatively low, investing may come out ahead over time. And if the answer is not obvious, a middle ground, part down payment, part financing, is often perfectly reasonable.
There is no one-size-fits-all solution. Vehicle purchasing is personal. So is your financial picture.
Still, it is helpful to ask a simple question:
Where will my dollars do more work?
This information has been prepared by Victoria Rempel who is an Wealth Advisor for iA Private Wealth Inc. Opinions expressed in this article/post are those of the Wealth Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
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