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With vehicle sales at record levels, our love affair with cars shows no signs of waning. Unfortunately, automobile sales are contributing to the average Canadian’s rising consumer debt, according to credit bureau TransUnion. What’s the problem? We’re taking much longer to pay off our car loans. While three to five years was once standard, today, dealerships offer low monthly payments over periods as long as 96 months. And we readily sign up for extended financing. “Ninety-six months doesn’t sound as long as eight years,” notes Stephanie Holmes-Winton, a Halifax-based financial services educator, CEO of The Money Finder and author of $pent.

Making matters worse, many of us buy new vehicles before paying off the old ones. But consumers should understand the short- and long-term interest costs, says Kim Taylor, director of personal lending with RBC. “You need to know how much you want to borrow and the interest on that amount, and have a plan for how you are going to pay it back,” she says. This foolproof approach to car buying will help you get started.

1. Know what you can afford

Holmes-Winton has a rule: If you can pay off your car in three years or less, you can afford it; if you can’t, choose a cheaper vehicle or a used car, or keep saving and only buy when you’re ready. “Car payments can suck your cash flow dry, so you want them to end as soon as possible,” she says. “You also don’t want to run the risk of having a car payment on a vehicle that you’ve decided to trade in.” Give your sales rep your desired monthly payment and the three-year stipulation right off the bat. “What that does is it limits [retailers’] ability to set a payment over a long period of time,” she says.

2. Don’t be swayed by low financing 
Zero-percent financing is sometimes accompanied by hidden fees. Extra costs might have been rolled into the price of the car, meaning you’ll be spending more for it than if you were to pay cash. Holmes-Winton suggests you do the math to be sure. “If your loan is any higher than the sale price, there’s a fee in there somewhere,” she says.

3. Buy during the off-season
May is the beginning of car sales season. If you hold off on buying the one you are eyeing until later in the year, it can pay off in savings. Dealers are most eager to off-load last year’s vehicles from November through February, often at substantial discounts, says Holmes-Winton.

4. Shop at month’s end 
Some car salespeople have monthly quotas. There might be a big push to meet or exceed monthly targets, so staff might be more flexible with price negotiations or throw in extra options. Research and test-drive the vehicle ahead of time; that way you’ll be ready to take advantage of any last-minute deals.

5. Be wary of refinancing
Let’s say you finance a car at 5.5 percent interest. A few months later, you refinance your mortgage at 3.5 percent and decide to pay off your car loan by rolling it into your mortgage. Sounds good on paper—but you’ll need to pay attention to how your car payments are structured. “Some car loans charge you all the interest at the beginning of the loan and all you have left to pay is the principal,” Holmes-Winton explains. “If you refinance under these terms, you’ll be paying even more interest.”

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