Buying your first car is an exciting time – a time of independence and increased freedom – and also, for many of you, your first experience with borrowing money.
This exciting time therefore brings some important decisions. How do you pay for your car? Can you get help from your parents, or do you save the entire amount and pay cash? Will you be able to get a personal loan through your bank, or finance through a car company, or do you just use a credit card to pay for your car?
What are the options?
Firstly, you need to understand that interest rates will vary depending on the lender’s perceived risk of your ability to pay. So, a first car buyer with little-to-no credit or employment history will be seen as high risk, and therefore will typically be charged a higher rate of interest on their loan.
How do you overcome this? Consider having a guarantor, such as your parents. From the lender’s perspective, the risk is lower, so the rate of interest will be much. But - there are two important considerations here:
1. Your parents take a risk in being liable for the loan by putting themselves down as guarantor – this should be discussed and agreed to by everyone involved.
2. While it might be easier to get Mum or Dad to borrow the money in their name, having the loan in your name allows you to establish your own credit rating, which is an important first step in managing your personal finances.
Secondly, find a lender that will give you the best deal. Generally, finance offered by the car dealership will be the most competitive (with the dealer operating collaboratively with a bank or financier), a secure car loan (fixed rate personal loan), from a financial institution is next-best and last would be credit card providers which should be considered very carefully.
Regardless of the type of finance you choose, it’s not just about finding the best interest rate, but also limiting the amount borrowed so that the monthly repayment amount is manageable.
One strategy to make your car loan repayments more affordable each month, is to opt for a balloon payment. A one-off lump sum residual payment is paid to the lender at the end of the loan, reducing the amount you repay each month.
However, balloon payments for motor vehicle finance should be carefully considered because a car is a rapidly depreciating asset. The longer the term of the loan, the more likely you are to end up in a negative equity situation with the final loan balance being more than the value of the car.
You should also be sure that you are not paying too much for the car. If you have a low interest rate on the finance deal but pay $2000 above the market price for the car, the finance savings are lost on day one. Carsales.com.au is where the majority of used cars in Australia are advertised and the search functions quickly allow you to compare any make or model in the current market.
Used cars can be purchased from private sellers or dealers. Private sellers are often cheaper, but consider the benefits of buying from a reputable dealer, such as strict manufacturer requirements, warranties, safety checks, etc. When buying a used car, also make sure the vehicle is free of finance encumbrances and has not been previously written off in an accident. These checks can be easily done online.
Finally, while the weekly repayment of the loan is one consideration on your weekly budget, so too should be the costs to run and maintain the car. These will include fuel, servicing, repairs, tyres, registration costs, insurance, depreciation, etc., and are very much dependent on the type of car, how old it is and how many kilometres travelled each year. Depending on these conditions, running costs per week (including the loan repayments) can range from $100 to over $400 per week. https://www.racq.com.au/cars-and-driving/cars/owning-and-maintaining-a-car/car-running-costs
For more information and resources you can use in the classroom to teach your students about this important topic, check out
Other helpful Financial Basics Foundation resources found in ESSI Money weekly newspaper articles include:
Week 20 - personal loans
Week 23 - motor vehicle insurance
Week 24 - buying a motor vehicle
Week 25 - credit file
BDO in Australia is committed to working with Financial Basics Foundation to equip young people with strong financial literacy skills to enable them to plan ahead for a bright future.