Minimising the cost of car finance
When financing a car, there are several costs to keep in mind. It is important to accurately budget so that you know exactly what you are up against.
Your primary expense when purchasing a vehicle will be the car itself. The repayment/cost structure will vary depending on how you finance a car.
There are several forms of car finance agreements. A hire purchase agreement is one option to explore. But for the majority of individuals in Australia, a consumer loan is what most people have in mind when they think about car finance. A consumer loan is by far and away the most popular method of vehicle financing in Australia. A consumer loan transfers ownership of the car from the outset, and have regular monthly repayment obligations to meet in accordance with a pre-determined structure.
For businesses, a chattel mortgage is an appealing way to secure a loan against a vehicle. Repayments options in this sort of financing agreement are flexible, with weekly, fortnightly or monthly intervals, and the only qualification is that at least 50% of the car's use must be for business purposes.
In investigating different car finance options, your most important consideration should be that you feel comfortable with the repayment structure and the degree of comfort you feel with the company you are working with. There is no reason that buying a car ought to place you under extra pressure or stress, some simple research or even just asking around for information and quotes from different insurance providers, ought to yield an option that suits you.
Depreciation
One often forgotten variable when considering car financing costs is the rate at which a vehicle devalues, or depreciates. Although some cars, like rare or classic cars may appreciate in value, in general cars are depreciating assets. The fact is, some vehicles hold their value better than others. When you come to trade in your vehicle, if you have chosen the right car and maintained it, you will notice a much greater trade in price for this vehicle.
Doing your own homework by asking around or doing some basic online research is a good way of getting a sense of varying rates of depreciation. When weighing up the pros and cons of two vehicles and comparing their costs, it is important to remember to estimate their respective values in two or three years' time. Generally, white cars hold their value better as they are more popular (hence making the vehicle to sell) and white is a colour that rarely goes out of fashion (as opposed to some ‘faddy’ colour)
Insurance
If you are looking to get finance on your new vehicle purchase, a financier generally requires you to have the vehicle insured. Even if you're not applying for finance, it is still generally considered pretty foolhardy not to insure your vehicle, and is not a course of action we would ever recommend. So let's work on the assumption that you will be insuring your vehicle.
The cost will depend on several variables: the vehicle, and the purposes you will use it for (business/leisure), the distance you anticipate travelling in it each year, as well as your age, occupation and previous road record will all be considered. If you live in an urban or suburban area - where there is an increased chance of the vehicle being involved in an accident, or being vandalised or stolen, than there is in quieter rural areas - you can expect to pay more for insurance.
Another consideration when assessing the cost of insurance is the “no claims bonus” offered by most insurance companies. These bonuses are discounts on the insurance premium that typically range from 20-25% for people who haven't made a claim for one year to as much as 65% for five years without a claim. The value of “no claims bonuses” vary significantly between different insurers.
Types of policy
There are two main options to consider for motor insurance policy – 'comprehensive' cover and 'third party, fire and theft' insurance.
Comprehensive cover insures against all the risks of 'third party, fire and theft', but also includes coverage for the costs of repairs to accidental damage to your own vehicle and compensation for any medical costs incurred by injuries to yourself or your passengers as the result of any accident involving your car. In the event of your death or disablement, an amount specified in advance will be paid out by this insurance policy. It also covers certain personal effects in your car.
'Third party, fire and theft', by contrast, covers just the essentials. Your liability for injuries to other people, including your passengers, is covered by this policy, as is any damage you cause to other people's vehicles or property. The policy also reimburses you for any losses due to fire or theft.
Saving money on premiums
Some useful tips:
● Invest in safety features. Insurance premiums can be noticeably lower for cars boasting a good safety record.
● Pay more excess. It is the case with most policies that you pay a certain amount (typically at least $150) of the compensation for each claim you make. If you agree with the insurance provider to increase the 'excess' you will pay on each claim, you can make significant savings on your premium.
● Many insurance companies offer special benefits to older drivers. Because those over 50 are statistically in far fewer accidents than younger drivers, they can receive lower premiums for certain policies.
● Research. To emphasise again, it is important to do your homework so that you feel comfortable with the policy you take out.
Fuel
Take some time to consider the amount that you are likely to spend on petrol for the vehicle each year. This expense will depend on the distance you anticipate travelling, the fuel efficiency of the car in question, and of course the price of fuel throughout the year.
If we assume an average car has a fuel economy of 10km per litres, that we will be driving 15,000km in the next year (approximately 300kms a week), and make a conservative estimate for fuel prices of $1.30 a litre, we can expect to spend about $1950 per year on petrol. This works out to a weekly budget cost of $38.
This is a purely hypothetical example, of course. For larger cars, with worse fuel efficiency, fuel expenses are likely to be much higher.
Other costs to consider
There are several other factors to bear in mind when anticipating the costs involved in the purchase of your car:
● Servicing – This can entail a large outlay, especially if you do not have the know-how to perform more minor work such as oil and filter changed.
● Repairs – The cost of these can easily add up without you even noticing, as the costs for minor repairs as a result of standard wear and tear accumulate.
● Road tax – The cost depends on the size of the vehicle you are buying.
● Membership – Joining clubs such as the RAC or the AA, in order to enjoy the benefits of their road-side breakdown service and other advantages, is an expense that ought to be considered.
● Registration costs and taxes – These are often expenses that recurs annually. Registration, stamp duty and transfer fees all add up. Certification providing proof of roadworthiness can often be an additional requirement, necessitating an inspection and its associated costs.