Personal Finance

How to choose a car (the mostly-rational way)

There comes a time when you need a car (or two, but almost certainly not three). If your car-liking muscle exceeds the power of your money-saving muscle, this isn’t a post for you so stop reading. But if you think you might be able to make a purchase based solely on rational thought within the context of spending the lowest amount of money without dying in a horrible car accident, read on and I’ll tell you how to choose a car. Also, if you think you might like to just hear what I have to say and then make a decision, I’m down with that.

Hyundai Sonata

My Car is a 2011 Hyundai Sonata Limited. I like it.

Do I need to choose a car?

The absolute best car you can buy from a financial standpoint is a TFSA. “But that’s not a car”, you say. Oh right. But if you can ride the bus without strenuous effort, or walk, that is way cheaper. Be honest with yourself: you don’t need a car to get 2 km to work unless work involves hauling dozens of kilograms of random crap to and from your job in the snow every day. Even then you may be able to get away with a cargo bike if you live in a moderate climate. Bicycles are a good option. In the warmer months I like to ride my bike to work on days I’m not working from home. It’s 7km one way and takes about 20 minutes. It’s a great way to unwind and get time to think and it saves money. Quite a bit actually.

So you need a car

You’ve established that you absolutely need a car. There are three things that make a car cost money— capital cost, maintenance and operating expenses. These can be expanded into five simple bullet points for simplicity.

  1. How much does the car cost to buy?
  2. How well does the car hold value?
  3. How much fuel does the car use and how much do I (or should I) drive?
  4. How much does the car cost to maintain?
  5. How much does the car cost to insure?

To choose a car, you should ideally calculate all of these things and put as much research as possible to get accurate information.

Capital Cost

Getting the price of a car is easy: ask the seller. The problem is that what you do with that number matters. There are several ways that you can actually buy a car and each method has implications to the buy and sell prices.

Ways to buy a car (not including taxes, fees and rebates)
Payment type buy price sell price
Cash Sticker price residual value
Loan from dealer or bank Sticker price + interest residual value
Lease and return Sticker price + interest – residual value $0
Lease and buy Payment * number of payments + buy price residual value

In the table above, I wrote “interest” a bunch of times. This is an annuity calculation. You can figure it out pretty easily without actually having to talk to a banker. Then you have to figure out roughly how long you plan to own the car for and what it will be worth at the end. This is called the residual value. If you’re leasing the car then planning to return it you already know how long you’ll have it and what your residual will be ($0) so just multiply the payments by the number of months you’ll have it. If you plan on driving it into the ground the residual value will be $0 as well. The biggest reason not to do this is that the cost of maintenance at the end of a car’s life is staggering. Another reason not to do this is that the reliability of a very old car (i.e. a car worth trashing for $0) is terrible. If you’re going to have an unreliable car there’s probably no point in having a car at all. Here’s a little hint about the capital cost of a car: it’s not as important as you think. Cars are money pits because they have to run and be maintained. The total amount you pay to drive a car is often significantly more than the difference between what you paid to buy it and what you receive to sell it at the end.

Maintenance

Oil changes, tires, brakes, the list goes on and on. Anything and everything can go wrong with a car. Guessing this number is hard, but there are some reliable places to look for hard data about how much the car can cost to maintain. If it’s a new car you’re looking for, ask the dealer to provide you with a maintenance schedule and approximate costs. Another good place to look is Consumer Reports. They’ve been aggregating car data for a long time and are arguably the best place to see how reliable a car actually is rather than asking friends who will give you anecdotal evidence at best.

Insurance

Call your insurance company or use a website like Kanetix to get a quote. You need to know much it costs to insure a car before buying it.

Fuel

This is a massive variable because it requires you to both figure out approximately how much you will be driving and to know the fuel economy of the vehicle you’re looking at. If you already own a car, there’s a decent likelihood that you’ll be driving roughly the same amount on your new car so that’s a place to start. For fuel economy, use the American website fueleconomy.gov and NOT the Canadian website. The USA has a new fuel economy testing methodology that is much more accurate than the Canadian one. Numbers on that site are often quoted in miles per US gallon. Canada uses a different gallon, and you can approximate the Canadian MPG by multiplying the US MPG by 1.2. Better yet, fueleconomy.gov allows you to see the units in l/100km which is the standard unit in Canada. Note again that these numbers will not match the dealer window sticker. Like I said, the Canadian numbers aren’t terribly accurate. Harsh winters also really affect fuel consumption. If you do a lot of stop-and-go city driving in the winter, you could see your fuel usage skyrocket. Mine does!

Electric cars

Electric cars are awesome. They have no fuel tank, muffler, catalytic converter or transmission and their motors have one moving part so typical maintenance involves rotating the tires. In addition, they are very efficient (often over 90% vs under 20% for an internal combustion engine). Electricity is much cheaper than gasoline in the quantities used by cars. There’s always the question of range (how far you can go on a charge) and charging time. Here are a few considerations about electric cars:

  • They cost more to buy
  • They cost less to run
  • They have limited range
  • You probably will rarely need to exceed that limited range
  • The money you save on gas can be used to rent another car for road trips
  • They’re significantly better for the environment

If you’re considering an electric car it’s very helpful to make a list of all the places you’d need to drive and the frequency that you make these trips to figure out the range issue. My research suggests that you can take the manufacturer’s range claims (often given in miles) and take them in kilometres at par. For example, if the manufacturer says the car has a range of 100 miles, it probably has a conservative range of around 100 km in the Canadian winter in city driving. Your mileage may vary… tremendously.

Run the numbers

Below I’ve embedded a spreadsheet that I whipped up. It shows the type of comparison that you should be making when you’re choosing a car. Please don’t take my numbers too literally. For example, I didn’t call my insurer to ask how much it would cost to insure a Tesla Model S, even though I really want one. I guessed. Sorry. Maintenance is roughly equivalent for the gas-powered cars and lower for the electric ones. Higher for the Tesla since it costs twice as much (I’m assuming). See what I mean about not taking my numbers literally? My goal here isn’t to tell you what to buy, but to show you how to figure it out for yourself.

Example of cost comparison over 10 years
Car Hyundai Sonata Limited Tesla Model S (60 kWh) Toyota RAV4 4WD 2.5 Nissan Versa Nissan LEAF
Purchase price w/ taxes, fees, financing & rebates $37,000.00 $91,000.00 $33,000.00 $22,000.00 $43,000.00
Residual value $7,000.00 $14,000.00 $9,000.00 $4,000.00 $4,000.00
Years of ownership 10 10 10 10 10
Projected fuel price ($/l or $/kWh) $1.35 $0.11 $1.35 $1.35 $0.11
Combined fuel economy (l/100 km or kWh/100 km) 11 24 12 9 23
Annual distance driven (km) 15,000 15,000 15,000 15,000 15,000
Annual insurance $1,575.00 $1,800.00 $1,500.00 $1,350.00 $1,500.00
Annual maintenance $500.00 $600.00 $500.00 $500.00 $400.00
Total capital cost $30,000.00 $77,000.00 $24,000.00 $18,000.00 $39,000.00
Total fuel cost $22,275.00 $3,960.00 $24,300.00 $18,225.00 $3,795.00
Total insurance cost $15,750.00 $18,000.00 $15,000.00 $13,500.00 $15,000.00
Total maintenance cost $5,000.00 $6,000.00 $5,000.00 $5,000.00 $4,000.00
Monthly cost $608.54 $874.67 $569.17 $456.04 $514.96

**The numbers used here are for example only and are not necessarily indicative of real market prices or actual maintenance charges. Some of them are completely fabricated.

There are a few take-aways from this table. The most expensive car is $875/month and the cheapest is $456/month, a difference of less than 2x. This is despite the fact that the actual sticker price of the expensive one is over 4x higher than the cheapest one. That’s why I said earlier that the sticker price of a car isn’t nearly as important as you might think.

Cars, yeah!

There’s definitely a value to having a car you like since you’re going to save a lot of money by driving it for a long time. When I bought my car, I picked leather seats and a sun roof. Was that financially prudent? No. Do I still like my car two years in? Yes. Will it help me keep my car longer? Probably. But I’m not fooling myself about it holding its value any better: premium cars tend to depreciate faster than cheaper ones. Hopefully this gets you started on the right foot when you’re ready to buy a car. Remember, the cheapest car is no car!

8 comments to How to choose a car (the mostly-rational way)

  • Kyle

    You also need to factor in the cost of renting real cars over 10 years if you plan on buying a Nissan leaf or tesla. This would make the monthly cost much higher.

    • It’s a valid point. In the case of LEAF vs RAV4 4WD in the above chart, you could rent a car in my hometown (Thunder Bay) for between 15 and 18 days and be at par. Gas would be extra, but insurance would be covered by your rider on the owned-vehicle policy. Fuel itself is a road-trip expense outside of this discussion since I only included 15k km/year of driving, enough for daily city driving for most people that could easily fall within a typical EV’s range. If you were to expand these figures to include highway trips (20k or 24k etc.) you would find that the savings for an EV are significantly higher and that there is even more of a compelling case for renting when you need the range. I believe the financial case for considering EVs is already there which is why I included this. They are no less ‘real’ than anything else.

      • Kyle

        If you expand these figures to use highway trips, you’d be Renting a car a lot more than 15-18 days a year, as leaf typical range is around 150km, hence not highway friendly. Also factoring in the utility of the leaf vs RAV, (cargo functionality) and I think your rental days would be >30/yr. but I guess that’s where the Versa comes in for a better comparison to the leaf?

        • I based my numbers on Natural Resource Canada’s 2009 light vehicle stats which indicated an average driving distance of 15,366 km. Also the average Canadian has 19 paid vacation days per year, some of which are spent at home. These tables aren’t static, it’s up to the reader to run the numbers for their own vehicle options given the distance that they’ll be driving as I indicated. While I do doubt people are cross-shopping a 4WD RAV4 with a LEAF, I put them in the same chart to demonstrate the importance of vehicle operating costs, which I think happened nicely. I expect money isn’t the only factor involved in buying a vehicle— a family of four can’t purchase a Smart fortwo ed even though it’s a really cheap car to operate. I standby my assessment that for the average buyer who is in the market for a new vehicle, renting a car for the few road trips they make in a year is likely worth it. That won’t work for everyone.

  • Derek Lawrence

    Hi Dean,

    So what do you think of Mitsubishi’s iMiEV? Its MSRP is around 33k I believe (that’s without any government rebates). It is rated for 160km (realistic range, 100km). It has a max speed of 130km/hr. We were tossing the idea around of this for a second car, for mainly commuting to work (either 15km one way or 26km one way depending who takes it).

    The insurance story is quite interesting. I recently got insurance quotes for adding a second car to our insurance. Here is the added cost to our yearly insurance bill for adding the following vehicles: (Keep in mind that these quotes are for adding a second vehicle to our policy. Rates would likely be different if this was your only car.)

    2012 Corolla: $1173
    2012 Yaris: $1186
    2012 iMiEV: $807

    Fuel costs are quite interesting. Annual fuel cost, driving 12,800km:

    2012 Corolla: $1150
    2012 Yaris: $1100
    2012 iMiEV: $200

    ($1.22/litre for regular gasoline, the price around here; $0.072/kWh, the off peak electricity rate)

    So, there are two things that really surprised me about this. One, why would anybody want to buy a Yaris instead of a Corolla? Fuel cost and insurance is surprisingly about the same. The only difference cost wise is about $2000 in the MSRP. The second thing that surprised me is that insuring the iMiEV is $366/year cheaper than insuring a Corolla. Surprising, because the iMiEV costs so much more to purchase. Maybe it has to do with the fact that the iMiEV has a top speed of only 130km/hr, so there is less likelihood of a fiery crash and resulting injury claims? I don’t know. Anyways, so between fuel and insurance savings, the iMiEV costs around $1400/year less than the Corolla to operate!

  • It sounds like an open-and shut-case. I should add though that Nissan has drastically cut the LEAF pricing this and it’s much more car than the iMiEV. Have you checked eBay for used LEAFs too? You can typically find one with under 5k miles for between $15-20k which is pretty unreal if you think about it. Major depreciation going on with 1st-gen EVs that aren’t Teslas.

    Re: the Yaris, yeah. It’s kind of a crappy car too if I understand correctly. Consumer Reports seems to not recommend it and among the cars-are-appliances crowd they’re kind of the go-to for buying advice. The new Corolla seems like an attractive car.

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