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Unit 3: Vehicle Finance Lessons

Financing a New Vehicle

Buying a Used Vehicle

Leasing a Vehicle

Vehicle Maintenance & Repairs

Fuel Economy & Fuel Costs

Vehicle Depreciation

Vehicle Insurance

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Lesson 1: Buying a New Vehicle

Purchasing a new vehicle involves many decisions. There are many types of vehicles,

models, colours, and options from which to choose. Vehicles differ in terms of size,

fuel economy, reliability, price, warranty, and reputation/quality.

Questions to Consider when Looking for a Vehicle

1. Why Should You Buy a Vehicle?

Convenience – you can go anywhere you want whenever you want (assuming

you can afford the gas!)

Commuting to work or school

Feeling of independence – you do not need to ask other people for a ride

Trying to avoid expensive repair costs on your present vehicle

Replacing your present vehicle because it is getting old

2. Establishing Your Needs

When will you use this vehicle? For commuting to work daily or for weekend

pleasure driving?

Will you be doing more city driving or highway driving?

Will you be the only one driving this vehicle?

Will you be using this vehicle for a carpool?

Will you be towing anything (e.g., a camper) with this vehicle?

What types of vehicles appeal to you?

What features of a vehicle are most important to you?

3. What Can You Afford?

Monthly Housing Costs +

Total Debt Service ratio (TDSR) = All Other Monthly Debts x 100

Gross Monthly Income

The TDSR should never exceed 40%.

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TDSR EXAMPLE

Chaska and Jacy are a newly married couple who have just moved into their own

house. They are trying to decide if they can afford a new car.

The car they wish to purchase will cost them $149 biweekly.

They are currently living in a bungalow with a monthly

mortgage of $1200. Heating costs are $75 a month, and

property taxes are $1300 a year. Chaska also has a credit

card debt that she is paying off with monthly payments of $120.

Chaska and Jacy’s combined gross monthly income is $4600.

a) Calculate their TDSR.

b) Should Chaska and Jacy purchase this car?

Solution

Monthly Housing Costs +

a) Total Debt Service ratio (TDSR) = All Other Monthly Debts x 100

Gross Monthly Income

Biweekly Amount x 26 = Annual Amount / 12 = Monthly Car Costs

149 x 26 = 3874 / 12 = $322.83

TDSR = 1200 + 75 + 108.33 + 120 + 322.83 x 100

4600

TDSR = 39.7%

b) Since their TDSR is very close to 40%, purchasing the car may not leave

Chaska and Jacy enough money for unexpected expenses. They may want to

consider a car that has lower payments, unless, however, they have plans to

finish paying off their other debt (i.e. credit card debt) in the very near

future.

Biweekly is every 2 weeks

or 26 times a year.

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Shopping for a New Vehicle After determining the type of vehicle you need and the amount you can afford, you

are now ready to go shopping.

Choosing a Dealership

The following are some of the points you should keep in mind when shopping for a car:

Visit dealers that have a good reputation.

Friends or family members may provide some good advice, especially if this is

your first car purchase.

Do some comparison shopping. Many dealerships will advertise different prices

for the same vehicle. This is especially true if you are trading in your present

car.

The location of a dealership may also be a factor in which dealership you

choose. A dealership closer to your home is more convenient when your car

needs service or repairs.

Before You Buy

After you purchase a dealership and a vehicle, be sure to do the following before you

purchase the vehicle.

Check the sticker price of the vehicle.

Obtain written quotes of the vehicle.

Test drive the vehicle.

Read the owner’s manual of the vehicle.

Read the warranty agreement of the vehicle. Warranty agreements of most

vehicles are available online.

Read the contract before you sign it.

Check that your financing is in order.

Most car companies offer a three- to five-year “bumper-to-bumper” warranty on new

vehicles, and extended warranties can be purchased that take effect after the

original warranty expires. Extended warranties usually only cover manufacturing flaws

or defective parts; they do not cover wear and tear on the vehicle due to age or use.

Saving Money

Below are listed some options that can reduce your costs when you purchase a

vehicle:

Choose a smaller vehicle. Dealerships usually have lower prices for small

vehicles for various reasons.

Negotiate for options. Some dealerships may be more willing to provide free

options for your car, such as air conditioning, rather than a lower sale price.

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Avoid buying brand new vehicles as soon as they arrive at the dealer. New

vehicles are in high demand and thus have a higher price. If you wait a few

months, the price will usually go down.

Look for reduced prices at the end of the year. Dealerships need to make room

for the next year’s models. Therefore, last year’s models will be priced to sell

quickly.

Look for rebates and incentives. These can come from manufacturers or even

the government.

Before Driving Your New Vehicle Home

After you have purchased your vehicle, you still need to do two more things before

you leave the dealership.

Check your vehicle for dents or scratches. Make sure your vehicle is spotless!

If you have purchased a new vehicle, there should be no wear and tear on it.

Match the serial number on your contract with the serial number on your

vehicle. You don’t want to be driving away with the wrong vehicle!

A serial number of a vehicle is a unique 17-digit combination of letters and numbers

assigned to a vehicle to distinguish it from every other vehicle. Serial numbers of

vehicles are usually located on the dashboard, and are visible through the windshield.

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Purchasing a New Vehicle

Most people finance (as known as taking out a loan) through the dealership to pay for

their vehicle. If you have saved up enough money, it is also possible to “pay cash” for

the vehicle at the time of purchase.

When you buy a vehicle, you can drive the vehicle as often and as much as you want.

Also, once you have paid for the vehicle, you own it and are free to sell or trade it

whenever you wish.

Trade-in Allowance

If you already own a vehicle, the dealer may give you a trade-in allowance for your

older vehicle. For example, the dealer may decide that your current vehicle has a

trade-in value of $5000 and credit you this amount in your new vehicle.

Purchasing a New Vehicle Outright

Manufacturer’s Suggested Retail Price (MSRP)

- The selling price that the manufacturer recommends to the retailer, also known

as the sticker price.

The MSRP of a vehicle includes:

The base price is the suggested price of the vehicle without any additional

features.

Optional equipment may include any of the options listed on the Vehicle

Features Chart, which can be cheaper bought in option “packages”.

The air-conditioning excise tax is a $100 payment required for vehicles with

air conditioning that are purchased in Canada or imported from the United

States.

The freight charge covers the cost that a dealership must pay to transport

the vehicle from the manufacturing facility to the car dealership.

The MSRP of a particular vehicle model will be the same at all dealerships. However,

the actual sale price may vary by dealership (to earn more money or to encourage a

sale).

In addition to the MSRP, the total purchase price of a new vehicle will include a

number of fees and taxes. These include a documentation fee, a tire tax, the PST and

GST.

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Calculating the Cost to Buy a Vehicle

To Calculate the Cost of Buying a New Vehicle (use the following steps):

1. Calculate base price + options + freight + additional fees

2. Subtract trade allowance

3. Add PST (8%) and GST (5%)

Example 1: Jesse wants to buy a brand new El Camino at a base price of $18 200. He

adds option group 2 for $526. Freight on the car is $640. He can trade in his old

Pinto for $1000. What is the purchase price of the car?

Example 2: Jackie wants to buy a Toyota Celica which has a base price of $35 280.

She will be charged $600 for freight and she wants the following options to be

added: All Weather Mats ($103), CD Changer ($697), and Splash Guards ($86). If

she trades in her old car for $3 000, what is the purchase price for the car?

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Lesson 2: Financing a New Vehicle

Purchasing a New Vehicle through Financing (loan) Because vehicles are expensive, many consumers cannot afford to pay for a vehicle

outright. Instead, many consumers finance the purchase with a loan from the

automobile dealership or financial institution.

When you take out a loan from an automobile dealership or financial institution, the

total amount you pay is greater than if you were to pay for it outright at the time of

purchase.

The total you pay when you finance the purchase of a vehicle is the

deferred payment.

The difference between the deferred payment and the total purchase price is the

finance charge.

A car loan is a type of personal loan. In order to calculate monthly payments based on

this loan, you need to consult an amortization table.

The amortization

table indicates the

monthly payment

required to pay a

$1000 loan for a

given time period

and at a given

interest rate.

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Example 1: Moira Wheeler is able to make a down payment of $5000 on the new mid-

size automobile she purchases in for $20 340.32. In order to finance the remaining

amount, she takes out a three-year car loan at a fixed interest rate of 6.25%

a) Calculate her monthly payment for the automobile.

b) Calculate her deferred payment for the automobile.

c) Calculate her finance charge for the automobile.

Solution:

a) Amount of the loan = Purchase Price – Down Payment

_____________________________________________________________

Using the amortization table on the previous page, along with the interest rate of 6.25% and the loan period of 3 years, we find the rate of $30.54 per $1000 of loan.

_____________________________________________________________ Note: This calculation is similar to finding the monthly mortgage payments.

b) Since Moira is repaying the loan in 3 years and there are 12 payments per year,

she makes 36 payments overall.

_____________________________________________________________

To calculate the deferred payment, we do the following:

Deferred Payment = Loan Payment + Down Payment

_____________________________________________________________ This is the amount Moira pays over the life of the loan (this includes paying the purchase

price and interest).

c) The Finance Charge = Deferred Payment – Total Purchase Price

_____________________________________________________________ This is the amount of interest Moira pays over the 3-year period of the loan.

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Example 2: The cost of Toyota Four Runner is $54 000 plus taxes. Toyota is offering

7% financing for a 3-year loan with a down payment of $4 050. Use the table to

determine the monthly payment and the total cost of purchasing the vehicle.

a) Total Cost (Price + taxes) =

b) Loan Required (cost – down payment) =

c) Monthly Payment (using chart) =

d) Total Cost of Purchasing Vehicle

(monthly payment x # of months + down payment) =

e) Re-Answer part c and d but change the financing term to 5 years.

Monthly Payment =

Total Cost of Purchasing Vehicle =

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Lesson 3: Leasing a new Vehicle

You may have already noticed that leasing a vehicle is not the same as purchasing a

vehicle. When you purchase a vehicle, you own the vehicle once you are done paying

back your vehicle loan. When you lease a vehicle, you do not own the vehicle at the

end of the lease. Instead, you have just paid for the use of the vehicle. This is why

you have a lower monthly payment when you lease a vehicle.

Conditions of a Lease Different car dealerships offer different leases that have different conditions. If

you violate the terms of your lease, you may be responsible for paying extra fees for

things like:

Extra kilometres driven

Excessive wear and tear on the vehicle

Ending your lease early

At the end of the lease, you can return the vehicle or you can purchase the vehicle.

Definitions

Residual Value:____________________________________________________

________________________________________________________________

________________________________________________________________

Depreciation:______________________________________________________

________________________________________________________________

________________________________________________________________

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Making the Decision to Lease a Vehicle The following are some factors you should consider when trying to decide whether or

not it is best to lease a vehicle:

1. Repair costs to the vehicle.

LEASE repairs are usually covered by a

warranty offered by the manufacturer.

If, at the end of the lease, the vehicle

appears to require a number of major

repairs, you should probably not

purchase the vehicle.

PURCHASE the vehicle and repairs will

be covered by warranty for a similar

period of time. However, when the

warranty has expired, you are

responsible for any repair bills, and you

may decide to trade the vehicle or sell

it.

2. How much do you drive the vehicle?

LEASE has limited mileage and if you

drive the vehicle more than the amount

specified in your lease agreement, you

will likely have to pay for the extra

kilometres at the end of the lease.

PURCHASE the vehicle and the number

of kilometres you drive does not affect

the amount you pay for the vehicle. It

may, however, reduce the trade-in value

of the vehicle.

3. What are the monthly payments for the vehicle?

LEASING is generally more attractive

because the down payment and regular

monthly payments are less than if you

buy the vehicle and have to finance it.

However, at the end of the lease, you

must return the car to the dealer,

which usually means that you now have

to buy the car you leased, buy another

car, or lease another car.

PURCHASE the vehicle and you must pay

for the entire vehicle, but after it is

paid you own the vehicle, and can

continue to use it as long as you want

without making any monthly payments.

4. How often do you change vehicles?

LEASING is better if you plan to drive

a new vehicle every two or three years.

PURCHASE the vehicle, take proper

care of it, and keep it for a number of

years or until it is worn out. You will

spend a lot less money than if you leased

new cars for the same period of time.

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Leasing a New Vehicle versus Purchasing a New Vehicle

Advantages of Leasing Lower monthly payments – capitalize by investing the monthly “savings”

Lower monthly payments – more affordable in the short term

Business owner – write off lease payments (if car is proven to be a business

“tool” or “need”)

Under warranty while being driven (no repair costs, covered by dealership)

Shorter commitment period – can return the car after the lease is up if you do

not like it

Can continually drive a new car (subsequently re-enter into new lease

agreement)

Disadvantages of leasing Penalized for excessive distance/mileage

Penalized for excessive wear and tear

No equity building

More expensive in the long run if purchasing following lease or continuously

leasing

Advantage to Buying a Vehicle No charge for excessive distance/mileage

No charge for excessive wear and tear

Monthly payments will provide equity

Less expensive in the long run if purchasing

Purchasing is less restrictive

No monthly payments, once paid off

Option to personalize/customize the vehicle

The car becomes an asset

Disadvantage of Purchasing Higher monthly payments

Owner assumes repair costs once the warranty expires

Stuck with the vehicle if it turns out to be unreliable

If you want to sell it, you have to do the work (not just give it back to the

dealer like in a lease)

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Calculating the Total Cost of Leasing a Vehicle

Example: The cost of a Toyota Four Runner is $54 000 plus taxes. The monthly lease

payment is $459 plus taxes for a lease term of 36 months. For leasing, a down

payment of $4 050 is required.

Total monthly payment = monthly payment x 1.13 (sales taxes)

Total Lease Payment = monthly Payment (after tax) x # of Months + Down Payment

Calculate the residual value at the end of the lease if the residual value rate for this

type of vehicle is 75% after three years.

Residual Value = Cost of Vehicle x Residual Value Rate x 1.13 (sales taxes)

If you decide to purchase the vehicle at the end of the lease the total cost would be

the Total Lease Payment plus the Residual value.

Total Cost of Purchasing Leased Vehicle =

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Lesson 4: Fuel Costs and Fuel Economy

Fuel Economy (Fuel Consumption) A major operating cost of a vehicle is the gasoline. Different vehicles require

different amounts of gasoline to drive the same distance.

The number of litres of gasoline a vehicle requires to travel 100 km is known as

its fuel economy rate.

The fuel economy rate of your vehicle affects

your gasoline costs. A higher fuel economy rate

corresponds to a higher cost of driving your

vehicle a certain distance (and a lower rate costs

lower costs).

The fuel economy rate of your vehicle will vary depending on: When you drive

How you drive

The type of vehicle you drive

The types of optional equipment installed

The condition of your vehicle

Most manufacturers voluntarily place

a fuel economy rate label on new

vehicles. The labels state the city

and highway fuel economy rates for

that particular model. The fuel

economy rate is higher for city

driving than highway driving

because of stop-and-go driving.

Extra fuel is used while a vehicle is

idling during a red light, and while

accelerating.

(*Note: when bought new, it could take up to 10 000 km for the vehicle to reach the

stated fuel economy rate)

For example,

a fuel economy rate of

7.4L/100 km means that

7.4 litres of gasoline are

required to travel 100 km.

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The following is the formula for determining the fuel economy of a vehicle:

Fuel economy rate is expressed in L/100 km.

Example 1: A sedan uses 18.4 L of gasoline to drive 225 km. Find the fuel economy

rate for the sedan.

Example 2: The Fender family is planning a vacation where they will drive a distance

of about 5000 km. The family has a van with a fuel economy of 12.7 L/100km.

Calculate the amount of gasoline required by the sedan to complete the trip.

FOR YOUR INFORMATION ONLY (NOT TESTABLE):

In the US, fuel economy is measure in miles per gallon, and many Canadians still use

the term “gas mileage” to describe fuel economy as miles per (imperial) gallon

instead of litres per 100 km.

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Fuel Costs Fuel costs vary across North America. Fuel costs can even vary within the city.

COST (in $) = Litres of Gas X Cost of Gas per Litre (in dollars)

Understand these three calculations:

Example 3: How much does it cost to fill a 40L tank at

$1.21/L?

Example 4: What is the cost per litre if a 50L tank costs

$58 to fill?

Example 5: How many litres does it take to fill a tank that costs $60 to fill at a

price of $1.10 / L?

Example 6: The odometer of a mid-size car reads 34 719 at the beginning of a trip

and 34 853 at the end. The car consumes 12.4 L of gasoline during the trip. Recall

that the odometer of a car tells you the total distance (in km) the vehicle has been

driven during its entire life.

a) Determine the fuel economy of the sedan.

b) If the cost of gasoline is 112.94 ¢ per litre, find the cost of driving 100 km.

Cost

($)

Gas

(L)

Cost/

Litre

($/L)

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Lesson 5: Maintenance, Repairs, and Vehicle Depreciation

Maintenance The following are regular maintenance tasks you should perform in order to upkeep

your vehicle and ensure it is running efficiently.

Regular oil change

Check the fluid levels

Change all fluids at intervals suggested by the

manufacturer

Check that your tires are inflated to the proper

pressure

Check for leaks under and around the vehicle

Repairs The older the vehicle, the more likely it is to need repairs, and the less likely it is to

be under warranty. Vehicle repair is unavoidable; therefore, knowing a technician you

can trust is invaluable.

Repair costs include the following three things:

Parts

Labour

Taxes (PST + GST)

Example 1: Melissa took in her vehicle to get

serviced. She had the oil and oil filter changed. She also had two headlights and her

muffler replaced. The costs were as follows:

Four litres of oil at $2.50 per litre

One oil filter at $6.25

Two headlights at $30.25 each

A muffler for $45.00.

The time required for servicing was 1.4 hours. The shop rate for labour was $62 per

hour. Calculate the total cost.

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Depreciation All vehicles lose value as they get older. This is called depreciation.

Resale Value

The value of the vehicle after years of depreciation (Note: A car may actually sell for

more or less depending on its condition and the demand to buy the car).

Example 2: Find the resale value of a $21 000 Honda Civic in 5 years if it

depreciates 20% every year.

Solution:

First year: $21000 x 0.20 = $4200

$21000 - $4200 = $16800

Second Year: $16800 x 0.20 = $3360

$16800 - $3360 = $13440

Third Year: $13440 x 0.20 = $2688

$13440 - $2688 = $10752

Fourth Year: $10752 x 0.20 = $2150.40

$10752 - $2150.40 = $8601.40

Fifth Year: $8601.40 x 0.20 = $1720.32

$8601.40 - $1720.32 = $6881.28

Alternate Solution:

Resale Value = Original value x (1 - % depreciation)# yrs

= 21000 x (1 – 0.20)5

= 21000 x (0.80)5

= $6881.28

The new Resale Value of the vehicle is ___________________________.

What is the total depreciation at the end of the five years?

Depreciation (loss in value) = Original Value – Resale Value

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Lesson 6: Buying a Used Vehicle

A new car depreciates in value as soon as you drive it off the dealership lot. The

resale value of the car is not only effected by the age of the car, but also the

condition, the mileage, and the demand from buyers.

WHAT TO DO WHEN YOU ARE LOOKING TO PURCHASE A USED VEHICLE:

Lien Search – a search to check if the owner owns the vehicle outright or if

there is money owing against it

Safety Inspection (certificate of inspection) – when a vehicle is inspected to

ensure that it conforms to provincial safety regulations.

o A mandatory procedure in Manitoba for vehicle registration

o The safety inspection cannot be more than a year old

o It covers brakes, windows, tires, lights, exhaust system, seatbelts, turn

signals, horn, and other components and systems related to safety and

emissions.

o Only subject to GST when done for the purpose of registering a vehicle

Diagnostic Test – an inspection of a vehicle by a certified technician to

determine the quality of the vehicle and whether the vehicle will need repair

work (optional procedure)

o Testing includes engine, transmission, suspension, body (to check for

evidence of accidents), exhaust system

Test drive the vehicle (both city and highway)

Phone MPI to see if it’s been in an accident

Consult Blue Book value – average monetary value of

a specific year, make, and model of a vehicle (roughly

what you expect to pay, depending on the condition)

======================================================

Costs When Buying Used from a Dealership ------------------------------------------------------------------

Dealer’s price plus PST and GST

Safety Inspection and Lien Search included in price

Diagnostic Test fee is extra

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==========================================================================

Costs When Buying Used through a Private Sale (NOT a dealership) ------------------------------------------------------------------------------------------------- Private sales can be found through Auto Trader, Kijiji, newspaper, and various forms of advertising. Use caution when purchasing privately (especially when the reliability of the seller is uncertain).

Taxes on Used Vehicle Purchased Privately

Item PST 8% GST 5%

Price of vehicle PST on the greater of the blue

book value or selling price

no GST

Lien Search no PST no GST

Diagnostic Test (optional) PST GST

Safety Inspection (required) no PST GST

Repairs on Vehicle PST GST

*This information is included in the Provincial Exam formula sheet

Example: Kevin wants to buy a used car from a private owner for $2100. He will need

to do a lien search for $3 and get a diagnostic test from a mechanic for $25. He also

needs to do $400 of repair. The book value of the car is $2600 and the car will need

to be safetied ($40). How much will the car cost Kevin?

1. Selling Price of Vehicle (paid to seller) =

2. PST use GREATER OF Book Value OR Selling Price (paid to MPI) =

3. Diagnostic Test and Repairs (paid to mechanic) =

4. Safety Check (paid to mechanic) =

5. Lien Search (paid to MPI) =

6. Total (add #1-5) =

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Lesson 7: Vehicle Insurance

GUIDE TO AUTOPAC

Access the MPI website at

https://www.mpi.mb.ca/en/Reg-and-Ins/Insurance/Pages/insurance.aspx

Click on the link to the 2018 Guide to Autopac and answer the following questions:

1. List the 4 major factors that affect your Autopac premiums (p. 57)

i.

ii.

iii.

iv.

2. Insurance works through grouping. Read the subheadings “How your

Autopac premium is set” on page 56. List the 3 risk factors that determine

who you are grouped with for insurance plans (p. 56).

i.

ii.

iii.

3. Describe Autopac’s definition of “pleasure passenger vehicle”. (p.58)

Pleasure passenger vehicle –

4. Describe Autopac’s definition of “all purpose passenger vehicle”. (p.59)

All purpose passenger vehicle –

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5. List 2 major communities in each of Autopac’s 4 territories (p.57)

i.

ii.

iii.

iv.

6. Why is Autopac cheaper in Territory 3 compared to Territory 1?

7. The highest driver safety rating of 15 results in a _________% decrease

on registration costs. The more merits a driver accumulates, the

___________ the discount. The more demerits a driver has, the

_____________ the discount.

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VEHICLE INSURANCE

Basic Insurance

1) $500 deductible on all driver at fault

accidents

Lower deductibles are available if

you buy into a more expensive

insurance package above Basic (page

30)

2) Third Party Liability (TPL) coverage

($1 000 000 to $10 000 000)

damage to someone else’s property

injury to another individual from an

accident outside of Manitoba

See more on page 31.

Determining Insurance Costs

Visit www.mpi.mb.ca to view more information about Autopac and vehicle insurance.

Visit http://apps.mpi.mb.ca/Irc/intro_2.asp?Lang=0 to get to the MPI Insurance

Rate Calculator.