This week we tackle another common dilemma, this time on the subject of cars!
Hi Tash – I hope you can help! My car is plagued with issues and is a total money drain, not to mention it also has a loan attached to it! I’m currently working on clearing a smaller loan which has an interest free period until later this year, then after that the financial priority is the car loan, and then the loan from the ‘bank of Mum’ for all the car repairs to date. But… I still need a car! So, what should I do?
- Keep my current car until it is irreparable?
- Buy a cheap used car and replace it within a couple of years?
- Buy a more expensive used car and hope to get another 15 years out of it?
- Get a loan for a new car with bells & whistles, warranty and hopefully a longer engine life than my current one?
Sometimes cars are more trouble than they are worth aren’t they!
This is another subject where everyone you ask will have their own opinion on what is best, which is usually driven (pardon the pun) by their previous experience. For example, those who have only ever had trouble with second hand cars will tell you to buy new.
Personally, I have only owned second hand cars and never had a problem, so I would favour used.
Ultimately though, whether it’s more cost effective to buy new or used really comes down to the specific car you are interested in and the specific deals available.
Generally speaking a new car can lose a lot of value as soon as you drive it out the door, so for that reason I tend to favour used over new. But on the other hand, there is always a risk with a used car that it comes with its own problems.
So you may need to compromise. Perhaps looking at a used car that is an ex-demo or still fairly new with a warranty could be a happy medium. That said, here are the steps I would take when making my decision.
Step 1: Decide on budget.
How much can you really afford to spend? Ideally I would avoid obtaining finance but if you have no other choice make sure you check out the fine print (eg restrictions that apply based on the age of the car). You can learn more here about what to watch out for with car finance.
Step 2: Do some research.
Which cars do you like that fall in that price range? Make a list of year, make, model, is it new or used, and price. I’d read up on their features, look at reviews by other buyers and do a test drive where possible.
Step 3: Talk to a mechanic (or two!).
It’s amazing how many people, especially women, skip this part.
Your mechanic is a gold mine of untapped car knowledge and information. I’d find out in their experience which makes and models have a good track record for low maintenance costs and fewer problems, and which ones are known to be the ‘problem children’ that you should avoid!
Step 4: Do the math
Now that you have a short list of makes and models, take a look at what deals are around for the cars that are left on your list and compare them to RedBook to see just how much value you would lose in depreciation if you bought new vs old.
Then add up all the costs of ownership that you have identified both for the new and used car and take it from there.
For example, say you hope to own the car for 10 years. Add up all the likely costs including the purchase price, maintenance costs (use your mechanic as a guide and the car dealership if they include free or capped maintenance), depreciation (in other words, what’s the likely resale value in 10 years time) and see which one comes out ahead for you.
Whatever you decide to do, remember the golden rule of building wealth is to spend as little as possible on items that lose value (like cars!) and put your money towards assets that will give a return on your investment.
As a wise (wo)man once said: buy the cheapest car your ego can afford!
Good luck and drive safe!
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