What are the vehicle options for a two-car household with a growing family?

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Q. I’m considering trading in our Mazda CX-5 SUV for a larger vehicle as our family grows. My wife and I just had our first child three months ago, and we also have a large 85-pound dog. We plan to have another baby so we will eventually need more space. Our dog sits in the back seat with a hammock-type seat cover that keeps him on the passenger side of the vehicle, and our son sits in his infant car seat on the other side. If we need to go anywhere with another adult, it is an extremely squeezed backseat ride for the third person between a dog and a car seat! A three-row SUV is definitely more appealing to us than a van.

Our current CX-5 is a black 2016 GX model with all-wheel-drive and 105,000 km on it. We financed it with an 84-month loan at 2.5% interest and have exactly three years left on it. Is there a “sweet spot” where the value of my SUV would equal what we owe on the loan?

I’m considering leasing our next vehicle because of the lower monthly payments. With a young family, would a lease for a new vehicle every three to five years for warranty and safety purposes be smart?

There are two drivers in our household. We also have a Mazda 3 that has just 19,000 km on it with five years left on the loan. We would keep the Mazda and not trade it in until it was falling apart so, eventually, we would only have the lease payments until we decided we wanted to buy something.
–Andrew

A. Your situation is shared by many growing families—you’re working to get the most out of your vehicle expenditure when you need to upsize and are already making payments for two vehicles. These are usually two-income households, but because cashflow is tight, low payments are sometimes more attractive than paying the lowest overall cost. Done properly, landing on the best option for you involves several considerations.

Turning a vehicle in early before the end of its loan is usually costly, especially if you have a long 84- or 96-month loan that is now typical for new car purchases. It takes a long time before the balance on your loan declines enough to equal the depreciated value of your vehicle. That’s called being “upside-down” in the car business; the dealer will use your trade-in to pay off part of the loan, but the balance owing, frequently in the range of $3,000 to $5,000, is rolled into the payments for your next vehicle. Sometimes the amount rolled over is greater than that, but retailers will hide it inside your payments during negotiations without disclosing explicitly how much additional debt you’ve taken on.

Consumers who “pull forward” their finance or lease contracts this way two or three times in a row end up with disproportionate vehicle debt. The Automobile Protection Association has seen examples, like a loan for more than $30,000 on a basic Hyundai Accent worth about $20,000; a loan for almost $60,000 on a Ford Escape priced at $35,000; and the big daddy of them all—a $100,000 loan for a Chevrolet Bolt EV that sells for $52,000. (The salesperson at the GM dealership told the buyer he’d make up the loss on his third “upside-down” loan in five years with the fuel savings on the Bolt—a fanciful representation.)

According to Jim Turnbull, general manager at Mazda Gabriel in Montreal, the “sweet spot” where the market value of a vehicle matches the outstanding balance of an 84-month auto loan rarely occurs before 60 months. Your vehicle has the advantages of a popular colour (black) and all-wheel-drive, but the mileage is a little higher than average. At this time, your CX-5 is worth about $3,500 less than the payout on your loan.

So, knowing this, what are your options? Here are some to consider:

Ask your passengers to squeeze into the back seat of your current vehicle for another year or so, until you reach parity on the loan. As your mileage rises, the trade-in value of the CX-5 will continue to drop, but at a slower pace than the outstanding balance of the loan in its final years. This is probably the cheapest, if not the most practical solution.
Trade up now, but keep your next vehicle for as long as possible—well past the end of payments. That is a better way to reduce your long-term outlay, but it’s one that many families are not comfortable with. You will need to hold onto your next purchase for the entire term of the loan to reach the true “sweet spot,” which is when you’ll own a paid-up vehicle. But by then your three-row SUV will have over 150,000 km on the odometer and it will be seven years old. Some additional service and repair costs are inevitable. Repairs are unpredictable and there is the variable quality of the work to contend with; that can be hard on a family’s monthly budget when savings are limited. However, long-term, it is almost always advantageous to extend the replacement cycle past the end of payments if your vehicle is not unreliable.
A workable compromise is to lease your high-use family vehicle but hold onto your second lower-mileage vehicle as long as possible. You are absolutely right to want to keep the Mazda3 well past the end of payments. Most of today’s compact cars cost little to operate and are simpler to repair than SUVs. With your low annual mileage, that car could last 15 years or more with little service apart from scheduled maintenance and new tires, battery and brakes.

What would each of these alternatives look like, financially? I asked Turnbull, the Mazda general manager, to run some numbers. We used the Mazda CX-9, a larger 3-row SUV, in its entry-level GS trim with all-wheel-drive in each example, and factored in a 1% “loyalty” interest-rate reduction that Mazda offers to return customers. Here are the payments, before dealer discounting:

Monthly payment to buy with 84-month financing: $593
Lease for 48 months with a longer 24,000 km annual mileage allowance to match your use: $546

The lease offers savings of about $47 a month. Over 84 months, that will amount to almost $4,000 in savings for the lease customer who also gets to jump into a brand new vehicle about halfway through.

Now let’s look at the impact of your “upside-down” loan should you decide to trade in the CX-5 now. I asked Turnbull to add in $3,500 of “negative equity” (that’s car industry speak for a debt—in this case, what you still owe on your current vehicle) onto your next loan. Here’s what that looks like:

Finance CX-9 GS with $3,500 negative equity: payment increases from $593 to $644
Lease 48 months with 24,000 km annual mileage allowance: payment increases from $546 to $630

An extra $51 a month to finance for seven years seems a lot less painful than paying $3,500 right away. But that’s where problems can arise—since you’re overpaying for the next vehicle to dispose of the current one early, you’d better plan to stick with the new vehicle until the end of the loan or lease.

Let’s assume you decide to finance your new SUV, and stick with it for the full 84 months of your loan term. At that time, you will outright own a vehicle that could provide a few years of payment-free service. Driving payment-free means you’ll be saving about $6,000 for every year you keep your older SUV (I’ve allowed an additional $1,200 a year for maintenance and repairs, above and beyond the estimated cost of maintaining a new vehicle). When it’s time to move on from that vehicle, the remaining value can be applied as a down payment toward the next purchase.

As you can see from the example above, it will take more than seven years before any savings are realized and, in the interim, your monthly outlay with financing will be higher. For many people, the payoff is just too far down the road to matter.

Now, to answer your question about which vehicle to move into next. Currently, there are a lot of choices in three-row SUVs, as the automakers are expanding their offerings to consumers who, in the past, would have chosen a minivan. Here are some models the APA has tested that could meet your requirements:

Mazda CX-9

Handsome, quick, with a very good ride, handling and steering. Luxurious cabin, lots of room in the second row, and good cargo capacity. Smaller front-seat space than other large SUVs, and small third-row seat. The engine is noisy, so check this out with a test drive before making your decision. No long-term data on the turbo engine.

Toyota Highlander

There could be some discounting as the current model is phased out in favour of the next-generation Highlander, due in January 2020. Very good overall performance with the best reliability and resale value in its class.

Kia Sorento

A leader in its segment on price and for low financing payments (Kias are usually not competitive to lease). The Kia Sorento includes a class-leading infotainment system and a comfortable cabin, as well as a small third-row seat where the dog should be happy. The full three-row version of the Sorrento is V6 only; the engine is very smooth but fuel consumption will be noticeably higher than your current vehicle.

For more complete information on new vehicles, take a look at the Lemon-Aid new vehicle reviews on the APA website.