Episode 104: Why Your Car Loan Is Draining Your Canadian Wealth (And How to Fix It) [Secret Sauce Ep20]

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Tired of sinking money into car loans that seem never ending while leaving you trapped in a pit of depreciation?

In today’s world, cars are a necessary expense for most of us, but they often come with financing options that may not be as beneficial as they seem. Whether it’s a high-interest loan on a used car or a tempting 0% deal on a new one, you could still be losing money without even realizing it. This episode explores how traditional vehicle financing might be quietly draining your wealth and why it’s time to rethink how you approach big-ticket purchases like cars.

We dive into smarter ways to finance your next vehicle without feeling the pinch. Whether you’re looking for ways to pay off your car faster or save on interest, this episode will introduce alternative methods, including using home equity lines of credit or even leveraging high cash value life insurance policies as a means to kick traditional financing methods to the curb. These strategies could help you avoid excessive interest payments and keep more money working for you, even while you finance the vehicle you need to get around.

What you’ll learn:

• Discover how to save on car loan interest using unconventional yet effective financing strategies.
• Learn why home equity lines of credit and permanent insurance policies could offer more flexibility and savings compared to traditional car loans.
• Find out how to keep your emergency fund growing while still financing a vehicle, turning your car loan into a wealth-building opportunity.

Tune into this episode now to learn how to finance your car the smart way and keep more money in your pocket!

Resources:

• Car Depreciation: How Much Is Your Car Worth? [Article on Ramsey Solutions]
• How Long Are Car Loan Terms in Canada [Car Deal Canada]
• Types of Car Loans in Canada [Reddit Thread]
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• Dig into our Ultimate Investment Book List
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Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

This episode helps Canadians to utilize creative car financing strategies aside from traditional car loans to save interest and grow wealth simultaneously. Compare how interest on a Canadian car loan is calculated versus taking a policy loan against a high cash value participating whole life insurance policy in order to save interest and grow your wealth tax free simultaneously.

Watch Now!

Transcript:

Hey there, Canadian Wealth Secret seekers! Today, we are going to dig into a secret sauce episode focused on something we all tend to finance and essentially waste our money on—cars. If you’ve been listening for a while, you know I’m not a massive fan of cars. I like cars; I think they’re great. I think they look awesome—some of them are very nice and better than others. But boy, do I dislike paying for them and watching their value decrease every day.

I understand that in today’s modern society, most people need a car unless they live in urban centers with great transportation. So, we’re going to talk about cars today. For many people, cars are something they feel like they’ve earned, and I’m not going to take that away from anyone. What we’re going to do is discuss different ways to finance vehicles. We’ll explore some options that are often touted as good or better, and we’re going to really try to get the rubber to hit the road—pun intended—on how we might go about financing vehicles and how you might shift your thinking a little after today’s episode with some of the ideas I’ll share.

Let’s dig in. For those hanging out with me on YouTube, you folks get a better glimpse because I’ll be sharing some screens and numbers. The first thing I want to do is share a website from Ramsey Solutions—that’s Dave Ramsey and friends. I want to highlight something about car depreciation that you may or may not know: as soon as you drive a car off the lot, it’s supposed to go down in value by about 9%. In this article, they say that in the first year, you can expect the average new vehicle to depreciate by about 20%, and then 15% each year for years two, three, four, and five. So, that’s not great, but hey, we need to finance cars.

Next, I want to talk about buying a new car and some of the financing deals you might see. When you buy a new car, there are often incentives, like 0% financing or maybe 1.9% financing, or whatever the number is. The reality is that there’s usually another option there. When you think you’re getting 0% financing, oftentimes the price of the vehicle is dictated by whether you take that low-interest rate option or not.

Let’s think about a 0% financing option on an $80,000 vehicle. Nowadays, it seems more and more vehicles are approaching $100,000 and beyond if they’re really nice. You can get that 0%, but if you choose another option, they might offer a discount—like $20,000 off the sticker price. So right there is the interest they’re kind of baking in. Be cautious when looking at these low-interest deals on new vehicles. On used vehicles, interest rates are typically not that low. For example, on CarDealCanada.ca, the average car loan interest rate in March 2023 was 7.25%, and in June 2024, it was 7.59%. Another site shows 8.09%. These are for people with different credit scores, but typically, for a used car, you’ll be paying a decent chunk in interest.

So, how do we want to fund this thing? Some people save money and then put a big down payment on a car. That’s not very fun, but paying 7% in interest isn’t fun either. Today, we’re going to explore some financing options. Some people, like me, have used home equity lines of credit to purchase cars, and I like that option. It’s less about the interest rate—on your home equity line of credit, you’re probably paying prime plus 0.5% or prime plus 1%, putting that at about 6.95%. It’s not so much the rate that I care about; it’s the flexibility.

With a home equity line of credit, as money comes into my bank account, I can commit to a certain payment amount, ideally matching what I’d pay a dealer or bank. You can set up an automatic payment, say $850 a month, or divide it up to come out weekly. The part I really like is that if there’s extra money in your bank account, but you don’t want to put it into investments or lock it up, you can push it onto the home equity line of credit and save on interest. They calculate interest daily based on the balance, so even if you put $3,000 on it for two weeks, it’ll save you some interest.

Now, let’s also consider something we discussed in a previous episode on building an emergency fund. In that episode, we proposed using a high early cash value life insurance policy as a place to store your emergency funds. Some might argue there’s an opportunity cost in the first year, but I’d say that most emergency funds are meant to grow. So, imagine funding your emergency fund for a number of years and then using it to buy a car. You could leverage against that policy to make the purchase. This would work like a home equity line of credit—you get to decide the repayment terms, and there’s a set interest rate from the insurer.

What I love about this strategy is that the policy keeps growing whether you borrow against it or not. So, instead of taking a loan against the car, you’re taking a loan against the policy. If the interest rate from a bank is lower, of course, go that route. But if it’s the same or higher, using your policy might be a smarter option because your emergency fund remains intact and continues to grow.

To demonstrate, I ran a comparison using a 6.5% interest rate, which is typical for the insurers we work with. Policy loans only compound interest at the end of the year, unlike car loans, where interest is compounded more frequently. That means you have more control over the payments. If you pay down the loan throughout the year, you’ll pay less interest overall. Over a six-year loan, you could save around $500 by using a policy loan instead of a traditional car loan. That’s about a 5% savings on the interest paid.

While $500 may not seem like a lot, it makes a difference when you’re talking about interest. Over time, the impact can be even greater, especially as the policy continues to grow in value, even as you’re paying off the loan.

In this scenario, I funded the policy for six years, similar to the amount we’d fund for the car. After six years, we stopped funding the policy, but it continued growing. We then leveraged $50,000 from the policy’s $64,000 cash value to buy the car, and as we made payments, the policy kept growing in the background. After six years of car payments, the policy’s cash value had grown to nearly $87,000, even though the car was fully paid off. So, not only did we save on interest, but the policy also grew, creating more opportunities for future use.

If we compare this to a home equity line of credit with a higher interest rate, say 7.45%, we’d be paying more each month and accruing more interest. In that case, using the policy loan would save us even more.

Ultimately, the goal is to be strategic in how you finance things like cars, which depreciate in value. By leveraging something like a high cash value permanent insurance policy, you can potentially save money and keep your options open for other investments or emergencies. Of course, everyone’s situation is different, so it’s important to consider what makes the most sense for you.

That’s your wealth secret for this week! If you’re interested in learning more about using a permanent life insurance policy as part of your financial strategy, reach out to us at CanadianWealthSecrets.com/discovery for a quick discovery call. We’ll help run your scenario and see if it makes sense for you. I look forward to chatting with you soon.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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