When Kim Kardashian goes car shopping, you just know she's not going to settle for any old car. Recently, the famously wealthy Kardashian kicked the tires on a $2 million Pagani Huayra — the first to become available in the United States.
Kim, ever on the cutting edge of fashion, has tapped into one of the latest trends: women buying luxury cars. Traditionally, buying flashy new sports cars was a man's game. However, women now account for 10% of Ferrari sales in North America — a jump from the traditional 1% we used to represent. Women are even more ambitious in China, buying 30% of Ferraris sold there. Tellingly, Kim didn't even bring her boyfriend Kanye West along to help her shop.
As we all know, buying a luxury car would be fun and would impress the neighbours to no end. If you had all the money of a Kardashian, it would be a no brainer. But for those of us on mere mortal budgets — is buying a luxury car a wise investment?
The perfect storm
Canadians are loving luxury cars as if they were Kardashians themselves. In October 2012, Porsche sales in Canada soared by 117% while sales of Audis increased by 38%. Overall, luxury car sales rose by 67% between 2001 and 2011. In 2012 alone, they have risen just over 13% so far.
What's behind this sudden passion for flashy cars? Here are five factors contributing to the luxury car boom:
1) Prices of luxury cars have remained pretty steady in Canada over the past 10 years, partly due to our rising Canadian dollar, which makes importing foreign cars cheaper, and partly because foreign automakers have become more efficient and cost-effective in manufacturing.
2) Canadians are feeling flush. Home values have risen dramatically over the past 10 years, so even if you don't have more cash in your back pocket, you may feel richer due to the value of your home and your subsequent net worth.
3) HELOCS free up funds for car shopping. According to a 2011 Leger Marketing poll, nearly 36% of Canadians have a home equity line of credit (HELOC), with nearly half of them using the loan for the purchase of a car.
4) Interest rates are historically low. This means that the monthly payments on a leased or financed BMW might end up costing you what a Ford Focus would have cost you several years ago.
5) Banks are happy to oblige. Mortgage restrictions have become more, well, restricted, making fewer people able to qualify for big mortgages. As a result, lending institutions are picking up the slack in their bottom line by promoting car loans with a new vigour.
Hidden costs and risks
While luxury car sales are up by just over 13% this year, it is perhaps no coincidence that car loans are also up by the exact same amount. Hey (we can hear you saying), if the bank is willing to lend you the money, well, why wouldn't you choose the sweetest ride you can buy?
Here are a few reasons to be cautious in your car borrowing-to-spend:
- Luxurious maintenance - Fancier cars require fancier parts, usually imported from Europe or Asia, so keep in mind that the upkeep of a luxury car will be more expensive than a modest economy version. Not to mention how it will pout if you fill it with anything less than Ultimate Extreme Premium Unleaded.
- Depreciation — Unless you are buying a rare vintage or special edition vehicle (like the Pagani Huayra, in which case, why do you need our advice?), your car will start losing value from the moment you drive it off the lot. Cars depreciate fastest within their first three years. Let the suckers pay the brand new car premium, while you buy an almost-new car that will hold its value for a longer period of time.
- Borrowing costs — At this point, there is only one direction for interest rates to go and unfortunately, that is up. If you can, lock in your interest rate now before they rise and pay off your loan before the term expires. Next to saving up and paying for your car in full, this is your most cost-effective move.
- Home values — We have been spoiled as home prices have done nothing but rise due to low interest rates, creating ever-more demand among buyers and a great big demographic bulge of baby boomers who traded up on their real estate for years. Now as that generation retires and downsizes, demand is expected to slow and with that comes dropping home values. If you have been using the equity in your home to finance your car purchase, you may end up facing reduced profits and reduced principal when it comes time to sell your house.
The luxurious way to buy a car
You don't think Kim is going to finance that sports car, do you? No matter how smooth the ride, how buttery the seats or how glossy the dashboard, getting stuck paying years of interest on a vehicle that costs you more in maintenance every year while it continues to lose its value — this is enough to turn even the most sexiest sports car into a ball and chain — and what kind of luxury is that?
On the other hand, saving up and paying for your car in full makes for the best luxury vehicle of all. Buying a car you can pay for outright means that your car will be an asset to you, rather than a liability. Freedom from monthly payments, freedom from the fear of rising interest rates which could render your car unaffordable, and freedom to sell it when and if you choose — this is the true definition of luxury, regardless of the brand of the car.
The vehicle you can afford to buy outright may not be a Pagani Huayra, but it will be yours, all yours. After all, we can all live like a Kardashian if we want to, just on a smaller scale.
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