Driving Best Deals
Newcastle Herald
Monday April 8, 2002
Car purchase is a significant investment, so do your homework on the best loans available.
BUYING a car is one of the biggest investments of your life - paying too much interest on the loan can take away much of the initial pleasure.
A good place to start when looking for a loan is the personal loan segment of the Cannex web site www.cannex.com.au which provides a mass of free information about terms and conditions of the huge range of personal loans available.
You will notice that some have a one-off establishment fee while others have ongoing fees. As personal loans are fairly simple doing the sums should not be too difficult, but choose a personal loan where you have the right to make additional payments without penalty.
Once you have done your sums it pays to go to your existing lender and try to negotiate a deal equal to the best you have found on the Internet. Banks are competing for business these days and will often negotiate better deals for good customers.
If you are buying a car for private use you should put down the maximum deposit and pay it off as quickly as possible. Because the interest is not tax deductible you need to pay as little as you can. Even if it means accepting payments that will stretch your budget don't be frightened to give yourself the challenge.
CASE STUDY
JACK and Jill each want to borrow $15,000 to change over their car. Both find a personal loan with a rate of 10% and no establishment or ongoing fees.
Jack chooses a two-year loan on which the payments are $692 a month, so his total interest bill is only $1613.
In contrast Jill looks for the minimum repayment so chooses a five-year term with payments of $319 a month. She pays $86 a week less than Jack does but the cost is huge as she incurs an extra $2504 in interest.
This is not the end of it; Jill also faces the very real possibility that the car will be worth less than the payout if she decides to trade it in during the loan repayment period.
It's a different ball game if a business is buying a motor vehicle because most businesses will try and match the monthly payments in line with the actual cost. Therefore, the choice is between hire purchase or lease.
Leasing used to be the norm but since the `simplification' of the tax system the choice is much more difficult.
If the car is bought under hire purchase the value of the vehicle is brought into the company's books as an asset and then depreciation is claimed as a tax deduction. Interest can also be claimed but this reduces each year as the loan balance goes down.
Lease payments are tax deductible if the price of the car is less than $55,134 but GST has to be paid on them and there is a sting when you come to the end of the lease as GST has to be paid on the residual value.
If the purchase price exceeds $55,134 the payments must be split in a similar fashion to payments on a hire purchase contract. Only depreciation up to $55,134 can be claimed. Understandably, most accountants and company financial controllers have decided that this is all too much work and have opted for hire purchase.
Be aware of the extra costs that may be involved if you use a `loan broker' recommended by the car dealer. Recently a reader advised me of his experience in buying a $6000 car. He let the dealer arrange the finance and then discovered that the loan had been written at $7760 made up of car $6000, first year's insurance $500, MTAQ gap insurance $500, loan application fee $100 and financial services fee of $660.
He bucked at this and arranged both the insurance and the finance elsewhere at cheaper rates. Fortunately he was smart enough to know that it's the height of bad money management to borrow money over four years for an annual cost like insurance.
Interest is a significant part of the cost of buying a car but far too many people overlook a far greater cost - drop in value. It is common for a new car to lose half its value within three years of purchase.
These days cars are so well made that canny buyers will almost certainly find they can save many thousands of dollars by buying a car between one and two years old. Noel Whittaker is a proper authority holder for Whittaker Macnaught Pty Ltd - licensed dealer in securities.
© 2002 Newcastle Herald
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