Deals on wheels - MoneySense

Deals on wheels


For years, huckster car dealers on late-night TV have offered to take that used clunker off your hands… so long as you buy one of their slightly newer… um, used clunkers.

Now it’s Ottawa’s turn to be the huckster. Environment Minister Jim Prentice is mulling over offering Canadians $3,500 to scrap their older, polluting car and buy a new one. Other countries, notably the U.S. and Germany, have introduced similar vouchers.

Of course, the purpose of the vouchers isn’t to rid the streets of gas-guzzlers. As far as the government is concerned, the last few 1980s Crown Victorias and Cutlass Supremes can continue to pollute freely. Instead, these programs are designed to kick-start the ailing auto industry, which is desperate to get people back into showrooms. In Germany, car sales shot up 21% during the first month of the program. (You can read a bit about how the U.S. program works here. Presumably, the Canadian version would be similar.)

Are these vouchers a good deal? If you planned to buy a new car anyway, it might be worth waiting to see what the made-in-Canada program looks like. A $3,500 discount (on top of whatever other incentives carmakers are willing to offer) is certainly tempting.

But if you’re car is working smoothly, you’re better off keeping it for a little while longer, no matter what the age. To understand why, we have to walk through the life of a typical vehicle. Let’s start on the dealer’s lot, where a shiny, new car awaits you. Go ahead. Kick the tires. Savor that new-car smell. Mmmmm. Good, isn’t it? So you buy the car and take out a five-year payment plan.

That’s when you make your first mistake. You drive your new car off the lot. Right away, it’s lost 30% of its value. Ouch!

After that, there’s good and bad news. The good news is your new car drives like a charm, and with a five-year warranty you won’t have to worry about paying for any repairs. On the other hand, you’ve got car payments to make. Once you add in the payments, taxes on the purchase price and depreciation, your car will cost you twice as much as the sticker price. In other words, if the price on the windshield is $25,000, you’re really paying $50,000 over the first five years.

How do you get that money back? Easy. Drive your car till it drops. Here’s why: After five years of ownership, you’re done paying for the car. But pretty soon your wallet will get dinged with repair bills. Somewhere between years six and eight of your car’s life, it starts to break down. It could be the muffler, the battery, the transmission or the head gasket. Or all of the above.

Once you’ve gone through most of those repairs, your car is actually in pretty good shape. You can expect to drive it for another couple of years before junking it. And it’s during those last few years, after your vehicle turns nine, 10, 11 or 12, that it really starts to pay for itself.

So feel free to take the $3,500 incentive. Just don’t count on saving any money.