Is financing a car actually a terrible deal? Why I think Financing makes a whole lot of sense if…
We’ve all heard it before, “only morons finance vehicles & other consumer purchases”, but is that really the case?
The reality is everything that you buy is financed… it’s either using your money, or someone else’s.
Buying a vehicle using financing is just that, it is using someone else’s money to purchase the vehicle you’d like to be driving.
To prove the point that it is actually, kindof a good deal (especially when hedging against inflation) i’d like to make a couple of points.
First: the money supply in Canada has shot up since the beginning of Covid. Sure, by and large Canadians had quite a bit of debt before the pandemic… and the economy wasn’t exactly rocking, but check out this stat on the monetary supply of CAD.
In March of 2020, we had under 100 billion in liquid cash floating around, that number has skyrocketed to above 440 billion by the end of September 2020…
That’s an increase of 440%…
Why does this matter?
As the monetary supply increases, prices must also increase. The Canadian consumer does not gain purchasing power because the government prints money… the purchasing power of the consumer stays the same.
That means that prices (over the long run) will increase by 440% (or more).
The reason these prices haven’t increased just yet is because Canadian businesses (the ones who received the bulk of the Governments spending incentives) are hoarding money in case this pandemic lasts a whole lot longer… (The day I am writing this is January 26th, 2021… We are currently in the 2nd wave of covid… but some experts believe there could be as many as 5-6 waves.)
Sure, again, as I write this, the vaccine is being dispensed, however, how long is it going to take for enough people to be vaccinated to hit critical mass and open up the economy fully so we can rebuild?
Second: even without considering the fact that there is 440% more money floating around than there was a year ago, the past 5 years’ inflation of the Consumer Price Index will shock you.
As I write this, the CPI from the end of 2020 was around 138, in 2015 that same CPI was around 124. That means over the last 5 years, your dollar would buy 10% less (if you trust the government…)
Third: The Dow Jones at the start of 2016 was sitting at around $16,400, at the end of 2020, it was all the way up to $30,600.
That means that if you had put the $27,500 (the average cost of a car sold in Canada in 2015) into the DOW Jones, and financed a vehicle, that money in the DOW Jones (i.e. the stock market) would be worth around $51,310.
Remember, everything we buy in life we finance… We either use our own money, or someone else’s.
How much does it actually cost to finance a car?
Often you see rates around the 5% range when dealing with banks, sometimes the dealers have 0% for a couple of years, sometimes, there are other promotions that make financing a car easier, but to prove a point, I am going to say that you are paying 10% (double the bank rate) over 5 years.
For that $27,500 car you purchased in 2015, you would end up paying around $35,000, a premium of $7,500. Sounds Expensive… but is it really?
If you would have buried the money, you would have wound up with 90% of it’s purchasing power. If you would have invested that money in the stock market, you would have ended up with 186% of what you started with, and the way things are going with inflation… it’s looking like in the worst-case scenario, that $27,500 could end up with 20% of it’s purchasing power over the coming years (unless the government finds a way to pull all of that money out of the system… without spending more…).
My point is, if financing a car always a bad deal… and the answer is if there are other places that you could use the money/invest it financing makes a whole lot of sense.
Sources:
https://www.bankofcanada.ca/rates/price-indexes/cpi/
https://www.macrotrends.net/1358/dow-jones-industrial-average-last-10-years