Ask anybody starting their first job what their financial goals are and most will include buying a car on their list of priorities.
Ask anybody starting their first job what their financial goals are and most will include buying a car on their list of priorities. If it's not at the top of the list, it will be one of the top three along with travelling overseas and saving a deposit for a house. Buying a car is usually the first most significant purchase in anyone's life, and it has the potential to set you off on a treadmill of debt if it you make the wrong decisions.
Let's compare two friends, Mark and Andrew, who each want to buy a car. Mark puts down a small deposit and borrows $10,000 from a bank over five years to buy his car. At current interest rates, his payments are around $140 per fortnight, which is within his reach as a single person working full time. It costs Mark $60 per fortnight to run his car, over and above using other forms of transport such as bus and train. That means he is paying around $200 per fortnight to have his car - a total of $26,000 over five years. At the end of the five years, he has paid off his loan but he has a car that is worthless and no savings. He has to borrow money again to buy his next car. Mark is in a continuous cycle of borrowing money to buy old cars that will keep going until such time as he can find a way of saving while still making loan repayments and paying for the running costs of his car.
Andrew decides not to buy a car just yet, but to start saving for one. Instead of spending $200 a fortnight on a car, he saves that amount. After five years, he has saved over $30,000 including the compound interest on his savings - enough to buy a near-new car. Because he has no debt and lower running costs (his car doesn't need as many repairs as Mark's car) he is still able to save at least $140 per fortnight. After five years, Andrew has a car that still has a good resale value, which, when added to his savings enables him to buy another near-new car for cash.
This example clearly shows the benefit of staying out of debt. Borrowing money to buy your first car condemns you to driving old cars unless you can find some way of saving while you are still making loan repayments. Delaying your first purchase until you can pay cash puts you on a different cycle of driving near-new cars, providing you can maintain your savings. It's never a good time to go into debt, and that is especially true now, with interest on car loans ranging between 12.5% and 17%.
If you are in a situation where you have no choice but to borrow money for a car, borrow funds over the shortest possible time period you can afford so as to reduce the amount of interest you pay. Shop around for the best financing deal before you start shopping for a car. It's tempting for the sake of convenience to arrange finance through your car dealer, but that may not be your cheapest option.
Article by Liz Koh
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