How to buy a car

If you’re hobnobbing it in the world of high earners – a la Bernard Tomic – buying a new car might be as simple as popping a canary-coloured Lamborghini on the Amex.

But for the rest of us mere mortals, going overboard on a new set of wheels can potentially be fiscally fatal.

“Other than it just generally being a large financial decision, it’s one that can lead people to spiral into a cycle of debt,” says Andrew Dadswell, a senior manager at ASIC’s MoneySmart website.

“The price you see on the dashboard, people don’t think about the ongoing costs – petrol, insurance, registration as well as things like paying for car parking.

“Even at the point of sale there are all these optional extras that can be thrown in, plus the cost of the finances.”

Concerned about the number of buyers getting in over their heads, plus the sometimes-shady practices in the industry, ASIC developed its own app to steer drivers in the right direction.

“The role of the app (MoneySmart Cars) really is to empower decision making for people looking to buy a car, especially first car buyers,” says Dadswell.

If you’re considering buying a new car with a price tag of $10,000, for instance, you can plug in all the particulars to see how much it will really cost over the long run.

If you have a $2000 deposit and borrow $8000 over five years, the app calculates the total cost of running and paying off those wheels at just over $44,000.

But unless you live in the heart of the city, or within spitting distance of a train station, going entirely without a car is often not much of an option.  So what’s the best way to get the car you want, within reason, without racking up a shedload of debt?

“If you can avoid having debt in any situation, it’s good, but obviously that’s not realistic for everyone. Ideally it would be better to save up enough money for a cheaper car,” says Dadswell.

Failing that?

“It’s really important that you shop around for the loan before you go the car yard,” he says. “Get your finances in place and know exactly how much your budget is.”

To do this, you’ll need to try and calculate the different costs of a new car versus a used one.

While a new car is typically said to lose thousands of dollars in value the moment you exit the showroom, there are some advantages to take into account, says Dadswell.

“What I can say is there’s some data that suggests that older cars are more expensive to run. New cars can often be more fuel efficient, but of course they’re more upfront.”

If you’re buying a new car, you’re probably more likely to be taking out a bigger loan – but the interest rates might be lower because you will be able to get a secured loan. In this case the bank uses your new car as collateral, and your repayments will probably be fixed.

For a secondhand car, you’ll be taking out an unsecured loan. You won’t be mortgaging your car, but you’ll likely be paying a higher interest rates because the credit provider considers this a riskier bet.

While you might pick up a bargain buying privately, don’t forget there’s no warranty. It’s also worth doing an ownership check using the Personal Property Securities Register to make sure the car won’t be repossessed if the owner still owes money on it. 

There are also upfront costs to consider, such as stamp duty and dealer delivery for a new car, or a vehicle inspection and car history report for an older model.

MoneySmart’s app warns buyers that in general, extra insurance and car modifications can be poor value, so be careful of the high-pressure sales pitch.

Four potential rip-offs to watch out for are: consumer credit insurance, gap insurance, extended warranties and mechanical breakdown insurance, and cover for tyres and rims, vinyl or paint.

Car loans that come with a ‘balloon payment’ can also be a killer, often requiring you pay a lump sum of up to 25 per cent of the cost of the car at the end of your loan period, which most people struggle to find in one hit.

Dadswell says before your loan’s up, the car yard may invite you back, try and upsell you to a new, more expensive car. That effectively rolls over your balloon payment to the next loan, so be wary!

Meanwhile, as with any big purchase, Dadswell says it pays to take someone with you – particularly if you’ve got someone you trust who’s more experienced at buying cars than you. If they’re a gun negotiator, even better.