For many Australians, the end of the financial year can be stressful as they scramble to get their tax affairs in order.
But for those looking for a new car there’s a silver lining, because the month of June is considered one of the best times to save money on a new set of wheels.
This year is no exception. Competition between car dealers is already hotting up, with brands like Toyota, Holden, Ford, Mitsubishi, Mazda, Nissan and Hyundai offering incentives such as free upgrades to get cars out the door.
While you can pick up a good deal at this time of year, it is easy to get distracted by the sexy offers and overlook one of the biggest questions – how you are going to pay for it.
RateCity money editor Sally Tindall says one thing to keep in mind is that a new vehicle is a depreciating asset.
“If you are going to borrow to buy your new car then you should do the maths and figure out what the total expense will be over the life of the loan.”
Many prospective car buyers will turn to the traditional car loan when looking for ways to finance their new wheels.
A car loan, which is essentially a personal loan taken out for the purpose of buying a vehicle, comes as either fixed rate or variable rate where the interest you pay on the loan is able to rise or fall.
Loans can also be secured, where you put up an asset as security, or unsecured, which usually entails a higher interest rate. Securing your loan against your new car can be a great way to reduce the overall amount of interest paid.
While the loan you take out may not seem like much at the time, the added interest will make up a big chunk of the repayments. Putting it in perspective, taking out a $40,000 car loan at the average rate of 10.75 per cent would cost you about $11,883 in interest over five years.
This type of finance is especially popular with young people who don’t want to borrow very much or are borrowing for the first time.
“First-time buyers find car loans easy to understand and to budget for, but you have to be careful because the interest rate charged can be high, so it pays to shop around,” Tindall adds.
Another alternative, for those with a qualifying home loan, is to use a mortgage redraw facility. This feature enables you to make extra repayments on your mortgage while still having access to the money if you need it – useful for buying those new wheels.
On an average home loan rate of 4.63 per cent a $40,000 redraw repaid over five years would cost you $4,885 in interest. But beware, leaving that amount on the mortgage for 30 years which would cost you $34,079 in interest.
The trick to succeed here, Tindall says, is not to spread your repayment over the life of your mortgage, but to make sure you lift your mortgage repayments and pay off the cost of the car as quickly as possible.
“To make a redraw work it helps to be a good saver,” she says.
Other common options are putting the purchase on your credit card, dealer finance where the dealer offers to arrange a loan for you, or so called ‘factory finance’, where you borrow directly from a car manufacturer.
But no matter what financing option you choose, Tindall’s final word of advice is simple – shop around.
“By looking around for credit before you go and buy a car, you’ll get the loan that suits your budget and is the right choice for you.”
