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Mybudget
Drive down car costs
By Tammy Barton

O
Car for Salever the last few years, motoring associations across the country have reported that the cost of owning a car is skyrocketing. After factoring in petrol, interest charges, depreciation and other operating expenses, the running costs for an average family sedan now represent around one-quarter of the average weekly wage.

To make matters worse, the car market is a potentially bewildering jungle. I can’t help you choose a car, but I can help you to navigate the financial landscape of private car ownership. (Talk to your accountant if you’re running a business.)

New or used?

Cars (except for antique and collectable varieties) are depreciating assets. Depreciation indicates that something loses value over time. New cars depreciate very quickly. In fact, they lose 20 to 30 per cent of their value in the first few months of ownership.

Take for instance a new family sedan: In the first five years of its life, it will cost the owner the equivalent of about $80 a week in just depreciation alone.

The bonus of a used car is that the original owner has already shouldered a heavy load of the depreciation costs. According to RedBook, a family sedan that was bought new in 2009 for $39,000 will today fetch about $20,000.

If you’re concerned about the reliability of used cars, many dealers offer certified pre-owned cars that come with a warranty. Motoring associations also offer pre-purchase inspections.

Lease or buy?

Leasing a car is like renting a house or apartment—you get to use it for a while, but you don’t get to own it. As well as a deposit, you pay a monthly leasing fee over a period of time, usually two or three years. At the end of the lease period you must give the car back or pay a residual value to keep it.

When you take out a loan to buy a car, the repayments are based on how much you are borrowing (the loan principal) plus interest charges, calculated over a period of time. The average car loan is about five years. At the end of the loan period, you own the car outright. There is no residual balance to pay.

Leasing repayments are usually lower than loan repayments on the same vehicle. This can free up cash flow in the short-term, but the long-term costs of leasing are usually higher than buying. My other concern with leasing is that many people are drawn to it because it means they can drive around in a car they can’t afford to buy. Living beyond one’s means is never a good financial strategy.

The best scenario:

  • Buy a used car with cash. Not only will it save you money on interest and loan charges, you’ll have better bargaining power with sellers.
  • Don’t have enough cash in the bank? Create a budget which includes saving for a car. If you need the car more quickly, at least save as much as you can for the deposit. The less you have to borrow the better.
  • Anticipate all of your car’s operating expenses to see how this will affect your budget. You’ll need to include registration, insurance, loan repayments (if any), petrol, servicing, tyres, and contingency savings for unexpected repairs.
  • Focus on buying the car you need, which may not necessarily be the car you want. Financial independence will drive you further than a car.

This article was featured in The Advertiser 'My Week' lift-out on 1 August, 2011. Catch more of Tammy's money-wise tips in The Advertiser every Monday and in other News Limited publications.

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