Some say there’s nothing like the feeling of driving a brand new car out of the showroom. Personally, I am in tears just thinking of the depreciation. I reckon we tear up about 25% of the car’s value as we drive out of the showroom!
Many agree with me. Some 1.2 million Australians will buy a used car in the next 12 months, and it can be a money-saving option. Consumer group Choice estimates new cars lose around 14% of their value in each of the first three years and I reckon 14% in year one is very conservative.
Motorists spend on average of $14,000 on a used car, so it’s a major purchase. But it’s not something most of us feel comfortable with. A study by CarHistory.com.au, the automotive arm of credit reference agency Veda, found less than one in three motorists are confident about buying a used car.
Along with the risk of buying a lemon, there are financial issues that can be harder to pick that patched up bodywork or a dodgy diff.
One trap to be aware of is vehicles that still have finance owing on them.
In 2015, 12.8% of used cars on the market had an encumbrance, meaning money was owed on the vehicle. If you’re buying through a car yard, dealers are required to provide proof the car doesn’t have finance owing. But private sellers are not subject to the same laws.
It’s easy enough to discover if there is money owing on a used car with a simple online check through either the government’s Personal Property Securities Register or CarHistory.
If a car you’re interested in buying does have money owing on it, it’s important to be aware of the risks. When a car has been used as security against a loan, the financial institution involved has ownership rights over the vehicle.
There’s no guarantee that when you hand over hard cash to the owner, the money will be used to pay down the loan. And as the new owner, you could be responsible for paying off whatever is owing on the car - or the vehicle can be repossessed.
If you plan to buy a car that’s already under finance, it’s not the end of the world. Just be sure that when you sign your name to the bill of sale there is no money left owing on the vehicle. This may mean finalising the transaction in the offices of the financial institution that holds the car as security. That way the seller can pay off the loan on the spot.
Yes, I know, buying a second hand car requires effort, but think of the money you will save.
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.
The same approach to managing day-to-day money can be applied to long-term investments.