Drive a good deal on car finance

When it comes to your car, ongoing expenses can vary widely between makes and models.

Around 100,000 new cars are sold in Australia each month, and buyers often invest plenty of time finding the right vehicle. Along with price and performance it’s important to consider running costs. Some cars can lighten their owner’s wallets by several hundred dollars each week.

Money watchdog ASIC has cautioned that focusing on price alone can lead to poor choices in the car yard. That’s because cars come with a raft of ongoing expenses, which vary widely between makes and models.

The RACV’s annual running costs survey, which takes into account all the expenses associated with owning a car including depreciation, found the Suzuki Celerio is one of the cheapest cars to own among the 270 vehicles surveyed. It will set you back about $100.78 each week. At the other end of the scale, the Ford Mustang Fastback (5 litre model) can leave drivers out of pocket by $314.83 per week.

Exactly how much your car will cost depends on the distance driven, your choice of insurer (do shop around) and so on. The way we finance a car can also have a big impact on our hip pocket, and it pays to weigh up a variety of options.

There’s a good selection of car loans with interest rates below 7%, and some modern car loans offer fee-free extra repayments to help pay off the loan sooner.

A different strategy is to use home equity to finance a new car though it’s not always the cheapest solution.

Your mortgage is likely to come at a lower interest rate than a car loan but as home loans are paid off over the long term, you could end up paying considerably more in overall interest than you would with a separate car loan.

As a guide, paying for a $30,000 vehicle using a car loan costing 7% can mean paying total interest of $5,642 over the typical five-year term.

Alternatively, a home owner could add an extra $30,000 onto a $300,000 mortgage to fund the same car. Even assuming a loan rate of just 4%, this could mean paying an extra $17,505 in total interest over a 25-year term. That’s three times the interest charged on a car loan.

The best way around this problem is to consistently pay a bit extra off the mortgage but this calls for ongoing discipline.

This all highlights the importance of shopping around for the car finance option that will see you save money. Our cars depreciate rapidly, so it makes sense to pay them off as quickly as possible. And, as I have always said, if you have to own a car, owning the cheapest one your ego can live with is a great plan.

To make an informed decision check out ASIC’s MoneySmart Cars app. It works out the real cost of buying a car including interest and running costs.

 

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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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.