Posted at 6:00 am
1. The happy cash payment
In times of high interest rates, cash purchases should not be neglected, especially if they can tap into funds that would otherwise provide only modest returns.
Give up a 3% return to avoid a 7% loan? The savings are equivalent to a net return of 4%.
It’s the equivalent of a safe return, too! “Pay no interest, that’s pretty safe!” says David Poliquin, portfolio manager at BGY, Integrated Financial Services Inc., humorously during a conference call with his colleagues Marc-André Vachon and Vincent Bouchard.
“When the person already has investments, already has assets or already has the capacity for less expensive debt, buying without financing with the dealer can be a very serious option. In fact, we have been recommending it much more frequently to our clients in recent months,” she adds.
2. Long term possession
“For someone who wants to keep their vehicle for a long time, now and forever, buying remains the solution that will save the most money in the long run,” says Jesse Caron, automotive expert at CAA-Quebec.
Under current conditions, one might be tempted to opt for leasing for the sole purpose of reselling the vehicle at a profit at the end of the lease period.
“But who knows if the values will be maintained in four years. For someone who buys his vehicle to keep it for a long time, the purchase is still the best solution. »
However, the problem can be stated in another way.
3. Leasing: another financing option
Don’t be fooled by appearances: Both financed purchase and lease are debt.
In reality, leasing is equivalent to taking a loan repayable in 80 to 90 months, but whose object must be returned, refinanced or resold after 36 or 48 months.
For a Subaru Crosstrek lease in the amount of $31,117, at a rate of 3.99%, the monthly payment is set at $402 (before taxes) for 48 months.
At this rate and under the same conditions, a standard loan would be paid off in about 88 months. After 48 months, the balance on this loan would be approximately $15,000. According to data from the dealer’s website, the residual value at the end of the 48-month lease is set at $15,096. Please note that GST and QST will be added to the redemption value.
“Leasing is much more like financing in the form of a mortgage”, describes Marc-André Vachon. With a mortgage, I still have debt to refinance after the five-year term. The same for a rental car. »
4. The Residual Value Game
“The residual value is established by the manufacturer based on the number of kilometers of the contract, the duration of the term and its position in the market”, specify the BGY experts.
Should we worry about a higher salvage or fixed residual value due to today’s second-hand market? At similar interest rates, a higher cash value means lower monthly payments during the lease, says Marc André-Vachon. Of course, the repurchase value to be financed will be higher, but if, at the end of the lease, the market value is less than the residual value, nothing prevents the customer from returning the vehicle. Otherwise, you will be able to benefit from a higher market value.
5. The decisive point: the interest rate
“The interest rate is going to be a very important element in the equation, probably the most important,” says David Poliquin.
The tax issue adds a superficial layer of complexity to the dilemma. When leasing, taxes are added to the monthly payments, while when buying, they are included in the amount financed. “In short, either we pay interest on taxes, or we pay taxes on interest! “David Poliquín laughs.
But in the end, the lowest interest rate will generally dictate the choice between buying and leasing.
CAA-Quebec agrees with this analysis…as long as we maintain strong budget discipline, says Jesse Caron.
“In fact, leasing can be attractive if the interest rate is lower than the financing rate,” he says. But you have to be careful because some people could take advantage of this low interest rate to maximize the monthly payment, saying to themselves: I had a budget of $600, I’m going to rent $600. And buy a more expensive vehicle than expected.
6. The question of the second term
However, in terms of interest, the uncertainty relates to the “second term” of our lease. At the time of acquisition, it is generally unknown on what terms the cash value financing will take place. With the financing of the purchase in the longer term, the uncertainty of the interest rate is resolved.
“This is an element that may be in favor of the purchase,” admits David Poliquin.
However, the interest rate at the beginning of the possession continues to be a determining factor, while the amount of the debt is at its zenith. The principle is as follows: a near benefit is preferable to a far benefit.
At the time of the initial operation, when the rental rate is favorable, we can consider this option with more serenity if we anticipate that the financing of the second installment can be done under the protection of a mortgage loan at a favorable rate or by other means. low-cost financing, highlights Marc-André Vachon.
7. Prior agreement
Whether it’s for a purchase or a lease, there’s a good chance that the coveted vehicle won’t be delivered for several months. If there is a model year change in the interim, the price of the vehicle may have increased at the time of delivery. The financing or lease terms (interest rate, surrender value) may also have changed.
“We don’t want to sign the sales contract before we get the vehicle, even if the dealer pressures us to do so,” advises Jesse Caron.
Instead, we will sign a pre-agreement specifying the price, a matter of “not finding ourselves paying an overpriced price relative to market conditions that may have changed by the time we received the vehicle”.
8. Non-financial benefits
“You have to understand that when you buy a car, you have to consider both options and often it’s a very mathematical decision,” says David Poliquin. But basically, renting has many advantages over buying. »
So much so that at similar interest rates, BGY experts tend to favor leasing.
The most important of these advantages is the possibility of returning the keys at the end of the rental.
“It’s not an obligation,” he continues. It is a possibility, an option. Having a choice is always good. »
The customer retains the option to return the car, keep it, or resell it or assign the lease, depending on whether or not the cash value is greater than market value. In short, it has latitude.
9. The gap guarantee
A trucker didn’t see your truck and rammed it. Only one modern sculpture remains. Unfortunately, if the settlement paid by the insurer is less than the loan balance, you will have to pay the difference (unless, of course, you have the replacement cost endorsement).
This concern does not have to be with the lease. In the event of a total loss, monthly payments cease and the gap guarantee cleanses you of all negative accounts.
This is also a reason not to pay a cash deposit when renting.
“If the debt is greater than the fair market value of the vehicle at the time of the accident, the money I initially put into the car disappears at the same time as the debt”, formulates Vincent Bouchard.
10. The security deposit
However, there is another way to pay a rental contribution.
The guarantee or security deposit does not reduce the amount of the debt. It will be returned at the end of the rental. It will not go away in the event of a total loss accident.
This contribution “does not reduce the amount on which the interest is calculated, but it does reduce the overall rental interest rate. And that is usually very interesting”, observes David Poliquin. “We regularly do this analysis for our clients. Typically, when you put $1 into it, that dollar enjoys the equivalent of a 6-12% return. »
“In general, with equal rates, we prioritize the lease over the financed purchase, because there is the possibility of returning the vehicle at the end of the term, there is the option of a deposit and there is a gap guarantee, conclude our experts.
11. The Incorporation Exception
One final point: the problem of buying or renting presents itself differently for people who have an incorporated business.
“When it is incorporated, there are many tax elements that come into play, whether the vehicle is used for professional purposes or not. emphasizes David Poliquín. We do the math and, in most cases, recommend renting. »
12. The electrical case
You are considering a new electric vehicle. Should the rapid progress of technology encourage you to favor renting, fearing that the car will quickly become obsolete?
This concern does not enter into the decision, if we are to believe Simon-Pierre Rioux, president of the Quebec Electric Vehicle Association (AVEQ), with whom we have established contact.
“In Quebec, 93% of electric vehicle owners have purchased the vehicle,” he notes. You can make sure people have done their math. »
He himself had this fear when he bought his first electric car in 2013.
“Have vehicles lost their value? Not at all, because there was a lot of demand for low-end used electric vehicles, simply because people wanted to use them for shopping and their day-to-day. »
The problem arises all the less in 2022 as the autonomy of several models exceeds 400 km. “These vehicles will not lose their value. »