Our homes may be the biggest financial purchase we’ll make in a lifetime but our cars come a close second. And just like property, cars come with a range of ongoing costs. Yet research shows we tend to focus on a vehicle’s purchase price without weighing up all the other expenses like loan interest, insurance, servicing and fuel.
These regular costs quickly add up, and even a small vehicle can put a solid dent in your household budget. Figures from motoring group RACV show a KIA Cerato with an on-road cost of $22,290 can set a driver back around $139 a week, or $36,330 over the first five years, once all the ongoing costs including depreciation are taken into account.
Research by our money watchdog ASIC found that focusing on a car’s ticket price can see motorists make poor financial choices in the car yard. And with the average household juggling car debt of $19,500, it’s definitely worth looking at the whole picture to be sure a car is as easy on your budget as it is on the road.
To help drivers make informed decisions, ASIC has developed a new mobile phone app MoneySmart Cars. It works out the real cost of buying a car including interest and ongoing expenses, and provides hints and tips to avoid common car buying traps like being sold extras you don't need or want. It’s a great tool especially for first-time car buyers. Check out the app at the MoneySmart website.
For many of us buying a car also goes hand in hand with taking out a car loan, and this is one area where it is worth shopping around rather than just approaching your regular bank.
The smaller banks and mutuals like credit unions and building societies tend to be very competitive in the car loan market, with many offering rates below 7% even, in some cases, on used cars. That’s about half the rate you could pay with some of the big banks.
It can pay to speak with a lender to have a car loan pre-approved before you hit the car yards. Not all lenders offer pre-approval but knowing you are good to go with finance sets a clear buying budget and leaves you well-placed to negotiate on price.
Having your loan pre-approved also means you’ll be less tempted by dealer finance, which can come laden with expensive monthly fees and early payout charges that can go as high as $700.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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Less than one in three motorists are confident about buying a used car.