Grow Magazine

Never buy a new car

April 2016

How much does buying a new car really cost?

A dream vehicle can put a big dent in your finances, reports Neal Vaughan.

Love Top Gear? Thinking of upgrading to that great car you always wanted? You're not alone – Australians bought more new cars per head than anywhere in the world in 2012 according to Roy Morgan Research.

And in the year to February 2016, a record of approximately 1.16 million cars were sold across the nation, according to the Australian Bureau of Statistics.

“The truth is, financially, you're probably better off with your current car so long as it's safe and not heading to the repair shop every month. But if you simply have to have that SUV or sports sedan, it pays to take the slow road,” says Intelligent Investor senior analyst Graham Witcomb.

"If you can, pay in cash, it will save you a fortune in interest. And as a new car’s value falls rapidly the minute it leaves the car yard, you can save a lot by opting for last year’s model or a good-condition second-hand model," he adds.

According to NRMA, your new car could drop approximately 38 per cent to 60 per cent in value in its first three years through depreciation.

That means a mid-size new car you bought for $35,000 could lose a staggering $13,300 in its first three years in depreciation alone.

Avoid borrowing

Financial experts call “delayed gratification”: keep your current vehicle another year and you'll find it gets you from A to B just as well as it always has. In short, save up first.

That way you avoid paying interest on a rapidly depreciating asset – a double negative that burns dollars faster than any Maserati.

"If you do arrange finance or a loan, make sure you have the flexibility to pay it off faster and save interest – don't get trapped with a loan that's more than the car's worth if you want to sell it," says Witcomb.

Using the ANZ online car finance calculator as a guide you would repay around $850 a month to completely pay off a $35,000 new car loan at 7.6 per cent interest over four years.

As Witcomb explains, after four years that $35,000 car could well be worth only $18,000 and you've handed over close to $41,000 to pay for it. Conservatively, this is a total loss, including interest, of $23,000 in just four years. It’s clearly not the smartest move.

So do all you can to avoid borrowing to buy your new toy – whether through those confusing dealer-finance offers, a lease, personal loan or even a lower-rate mortgage redraw.

Mark Prior, a car enthusiast from Sydney, has learned from costly new-car purchases. "That new-car smell is extremely over rated. After a few months the initial thrill of buying our as-new Audi convertible wore off, then you have so much money committed you realise it made no sense at all. Waiting an extra year or longer would have saved us a small fortune.”

This type of car buyer's remorse is something that Witcomb has seen all too often.

"A little extra patience is the answer. Imagine you saved that $800 a month instead of repaying it, you'd have $12,000 in 15 months – enough for a pretty decent used car according to drive.com.au and with cash you can negotiate thousands off the dealer sticker prices," he explains:

This kind of patience means you will have a good second hand car paid for in cash and still have $800 a month freed up to invest – in another two years, with some interest, that's almost $20,000 you can invest.

Keep doing that and you could be driving a better car than you ever imagined.

For more advice on building your wealth through delayed gratification talk to a financial advisor. For information on keeping your car financing costs low when buying a new car, visit moneysmart.com.au.

April 2016