I ended up getting a 4 year old vehicle that had a bigger engine, was a convertible, had more safety features, better list of standard equipment, etc., etc.

And you know what? It cost about the same as when I purchased the similar vehicle (brand/model except for the convertible/coupe portion) as when I bought the a 3 year old version of it 12 years ago! And this was NOT factoring inflation into it. With the low interest rates, my financing terms mean it will actually cost me less.

It is truly amazing how little car prices have actually risen. I can get so much more car for a lot less (in constant dollars) than what I paid 12 years ago.

I would imagine a 5 year old car, especially in this environment, will be much harder to find someone willing to lease it to you thus limiting your options.

I think a 3 year old vehicle is a nice sweet spot – usually there is still 1 year of warranty left, it still is new enough to have most of the latest safety features (extra airbags, dynamic stability control, etc.) and should be relatively reliable with a good chunk of depreciation already absorbed by the previous owner.

I agree. If someone could loan me $10M at prime, I could invest it in the Canadian stock market and retire right now – and still sleep at night!

While the potential for gains and losses is magnified the more leverage you have, the inherent standard deviation of the investments’ prices are not affected – thus, this measurement of risk is not dependent on how much you leverage.

There is additional risk by leveraging more if your cash flow can’t handle it. Investing in dividend producing equities which can cover your interest costs helps mitigate this risk.

The CRA limits the leasing costs to $800/month (plus GST/PST), the interest costs at $3,650 (assuming you took out a loan to finance the purchase) and the Capital Cost maximum is (still!) only $30k.

I will need to get a new vehicle soon (mine is 13 years old) and based on my driving and tax rates it would seem I’m best to lease a quality vehicle and then, once the lease expires, purchase it at which time it should be less than $30k.

A 2-3 year old car doesn’t necessarily offer the savings or value that many people expect. While it’s true that a new car depreciates the most in its first year (usually 20-30%), you continue to see steep depreciation (15%+ a year) in the first 5 years of ownership. In some ways, a 2-3 year old car can be the worst of all worlds- you don’t get the choices/customization, full warranty, or sale incentives of a new car (or that oh-so-elusive new car smell!), but you still get the heavy depreciation. If you’re looking to avoid taking a big depreciation hit, you need to look at cars a fair bit older.

A leverage loan that is invested effectively for the long term is good debt. You could sell some investment to pay it off any time, but if you are confident in a good long term return on investment and your debt is a low tax-deductible rate, then you are better off having the debt and keeping the investments than selling some to pay if off.

Getting a tax deduction on its own is not enought to make regular debt “good”, since you would still be better off without a business car loan or student loan.

Ed

The issue with low rate car loans often is that extra cost has been built into the price of the car. If you could have bought at a lower price with cash, then the difference in cost is really extra interest.

Also, low rate car loans are generally only available on new cars. You can usually save far more money by buying used, even with normal car loan rates. A 2-3 year old car is usually only half the cost of a new one. It it because of the high cost of depreciation in the early years (and to get warranty work) that car companies offer the low rate loans.

Ed

My fiancee and my sister both bought new cars within the last year. Although reluctant, I managed to convince them to take low interest (0% and 0.9%) financing on their purchases (rather than paying cash) and put the money into their mutual funds or a high interest savings account instead.

Is there some downside that I don’t see? Is this still considered bad debt?

As a rule of thumb, always put your money on the highest interest rate whether it’s investing or paying down debt. You have to take taxes into account of course and not all investments have a clear rate of return, so it’s not always a simple rule of thumb to apply.

As mjw2005 pointed out, it really doesn’t make a lot of difference whether the debt is by was of Canada Student Loans or private loans, as fed/prov loans have an interest rate of prime + 5% (fixed) or prime + 2.5% (floating), whereas private students loans or lines of credit can have rates as low as prime (I’ve yet to see any discounted below prime) or prime + 0.5% / 1%. Even after the tax implications, there is little difference between the net amounts paid. The biggest benefit of a Canada Student Loan is that repayment is very flexible and can be modified ad infinitum.

I would ask my adviser but he suggested leveraged investments a while back with the comment “when is the last time you saw a bank lose money?” I get the feeling he just wants the commission off my debt.

Its difficult for people with assets and income to qualify for government loans for school…

If you needed to take a 10k cash advance on a credit card to secure a bid on some item you know you can make 11k on and repay the cash advance in a couple of days – that’s good debt.

If you took a margin loan to invest in some speculative mining stock or something like that, I would still consider that bad debt.