A car loan is very similar to a secured personal loan, maybe with a lower interest rate. Please read the fine print for the total amount payable (the interest, plus fees, plus the initial loan) and, like that computer deal we just looked at in the Personal Loans sub-topic, don’t get sucked into a deal for “just $7 a day” or “from $60 a week”. Although, to read the fine print in the TV advertisement, you may need to record the ad, then pause it and sit really close to the telly. If you’re like me and don’t have a 100 inch high definition plasma then you won’t be able to read print that fine, so you have to ring them to discover that the $15,000 car will end up costing you over $22,000. (Source: Southgate Financial Services phone quote; February 2008; loan term of 5 years.)
As with the other loans we have looked at so far, paying off car loans should be a priority if you have one, but the best scenario is not to get one in the first place. Motor Finance Wizard says “Yes!” Nick says “NO.”
Buying a car? – Private Fleet’s website has info on what to do and what to avoid. They will also find the best deal around for the make and model you are looking for – both new and used (for a fee of course, but you’ll probably end up saving heaps). *Disclosure*: I have been a customer of Private Fleet and they saved me a couple of grand. They are not paying me for this plug. They are also not about to give me an awesome deal on a car for this plug. This is a free plug. Anyone who works in marketing would say I’m an idiot.
Never buy a secondhand car without first checking to see if it is encumbered (i.e. if there is already a loan attached to it). If you buy a car that someone else has a loan for, and the person with that loan defaults on their repayments, the car can be repossessed. Yes, that means you are out of pocket and have no car. Vehicles in all states can be checked through the Personal Property Securities Register, where you can also see if there is debt owing on boats, machinery, art and a stack of other stuff.
You will be much better off financially if you save up for all the things we have looked at so far that can be bought with these types of loans. Save up and pay cash from your savings. Earn first, then spend. Don’t do it the other way around. Don’t spend money you don’t have. If you can’t afford it, you can’t afford it.
This does mean that you will have to save up and do it tough for a short while. Or buy now and struggle for a long time trying to pay the loan, and the interest, off.
Chris and Fiona were pretty hopeless with money. They had been in debt with bugger all to show for it for years. In February 2006, they had credit card and personal loan debts totalling around $24,000. Then they made the decision to knuckle down and pay them off.
By Christmas that year, not only were they free of the credit card debts and personal loan, but they’d also bought themselves a townhouse and were two payments ahead on their mortgage.
In relation to their wonderful achievement, my formerly fiscally hopeless mate Chris said, “It wasn’t easy, but that said it wasn’t torture either.”
Anything you would buy using a loan from a pawnbroker, payday lender, on store credit, a store charge card, credit card, personal or a car loan, all those things drop in value. A new car depreciates in value by a couple of thousand dollars as soon as you drive it away from the dealer. A dinner for two drops in value to zero before you have even paid the bill. I’m not saying you shouldn’t ever buy these things – it’s your money, and you can spend it on whatever you like. Just don’t buy these things on credit and pay interest on them. If you have borrowed for them, pay the loan off as quickly as possible. But remember…
Don’t borrow money to buy items that will only ever lose value. This is such an important rule in attaining financial freedom, whatever you define that to be. For me, financial freedom is about not being in debt. For you, it may be about never having to worry about money, or having enough money to study or try a different career, or spend more time with people you love, or even find the courage you need to walk away from a bad relationship. It’s up to you to decide.
We now move onto the two types of non-tax deductible debt that are for things that should gain in value; the two things for which it’s OK to go into debt: property and qualifications.