Cars are one of those unfortunate financial choices which are needed for everyday life but decrease in value by the day.
Owning a car can quickly add a hefty weight to the hip pocket once finance plus maintenance are factored in.
A self-confessed rev head, financial adviser Glen James from Sort Your Money Out says there are ways you can buy a car without it owning you
Here are his top money tips when buying a car.
New vs used cars
It’s only worth buying a brand new car if you plan on keeping it for at least 10 years.
“Otherwise, perhaps have a net worth of over $1 million to take the hit of depreciation because as soon as you drive off that lot, it could be ten to fifteen grand that flies away,” James said.
If buying a used car, James says the sweet spot is a car around three to four years old with less than 60,000 km on the clock.
Cars lose so much of their value in the first few years, which makes second-hand cars cheap and attainable.
Buying privately from classifieds and online marketplaces can have its advantages.
“You will pay a premium for a car salesperson or car yard. They offer a statutory warranty of three months. And they are running a business not a charity, so you will pay more.”
If you do buy from a car salesperson, make sure to keep your emotions in check so you don’t end up forking out more.
“Once you walk into a car yard, there’s going to be tentacles running to you. You’ll do the dance with the car salesman and start the negotiation.
“They will throw in the emotional stuff like capped price servicing for $200. My private mechanic does it for the same price anyway,” he said.
Don’t spend more than 50% of your income
You should not have more than 50 per cent of your net annual income tied up in things that are going down in value.
For a single person with an annual income of $80,000 per year, the annual net household income would be around $60,000, so the limit on spending on a car is $30,000. For a couple, James gives a guide of no more than $50,000 to spend on motors.
James believes this is a good guide and can be used in most situations.
Borrowing money for the car is a loan that must be navigated carefully.
Unless the car is being used for work purposes and a portion of the interest can be made tax-deductible, James warns against getting a loan or lease with balloon amount left to pay at the end of the term.
“If your work offers a novated lease, that can be quite advantageous if you’re doing a lot of kilometres or you’ve got high running costs of the car.”
However, the trap here is that if you leave your job, you’ll be carrying the burden of the lease, which is essentially the loan.
James says another must when borrowing money for a car is to never take a repayment term over four years.
“In this day and age, we are just not keeping cars for that long.”
Some people will refinance their mortgage to buy a car, James says. Instead, have a separate car loan because it can create a false sense of security to think you have 30 years to pay off the car.
“At least you know the car loan will be gone in four years,” he said.
If you are using finance over a four-year term and not spending more than 50 per cent of your income, the monthly repayment should be around one per cent of your take-home income.
For example, a person on an income of $80,000 would have a net income of around $60,000.
Therefore, the monthly repayments on the car loan should be no more than $600.
The first person to name a price will usually lose.
It might feel awkward, but hold your cards close and ask the salesperson first for their lowest price.
Watch out for car salespeople quoting a five-year repayment term. It looks attractive for its lower monthly price but can land you in hot water if you end up paying for a higher value car that you can’t afford.
Watch the video for Glen James’ tips on buying a car while being financially savvy.