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.