Flicking through automotive magazines or clicking on car ads in your social media feed can build the excitement of buying a new car, but an important step before you decide on your new ride is to calculate a realistic budget. The key is that this budget should not only cover the purchase price but a range of typically mandatory ongoing costs such as any loan repayments, registration, insurance, maintenance and fuel. Here we break down some of the important considerations to factor into your budget.
In Australia, there are many finance options available and choosing the best one for you will depend on your circumstances. You could choose to purchase a new car outright using cash that you have saved. Alternatively, you could take out a car loan from a bank or lending institution, obtain finance directly from the car dealer or enter into a rent-to-buy agreement where you pay an ongoing fee to essentially hire the vehicle, with the option to buy it outright at the end of the contract. Here are some of the pros and cons of each option, however, be sure to do your homework before making a decision.
| Finance option | Pros | Cons |
|---|---|---|
| Buy outright | • The car is instantly yours with no need to wait for an application for finance to be approved • Greater flexibility to sell or trade when you choose without having to worry about the terms of any car loan or leasing arrangement • Cheaper in the long run with no ongoing fees or interest charges to pay | • Those who need to save money may need to wait longer to make a purchase • Choice of car may be limited, with some potentially falling outside of your price range • It can be risky to spend all your savings, meaning it can be a good idea to save more in your account than you need to purchase the car to keep some funds for unexpected emergencies |
| Car loans | • Could broaden your options in terms of the car you can buy, as long as you can meet the required repayments • A fixed rate would mean your repayments stay the same for the term of the loan and you are protected from interest rate increases, whereas a variable rate can often be cheaper, at least to begin with • Meeting your repayments on time could increase your credit rating | • It is more expensive than buying outright, so check out all the fees and charges for the life of the loan to calculate your budget • If you choose to make extra repayments you may be charged additional fees, depending on the terms and conditions of your loan • If the loan is secured and you fail to make repayments, this could damage your credit rating and could also result in your car or another form of collateral being repossessed • Choice of car could be limited by your budget and whether you can afford the repayments |
| Dealer finance | • Usually fairly quick to arrange with assistance from the dealer • May include an incentive, such as zero interest, for the first few months of the loan | • Same as for car loans plus interest rates are usually higher than a personal loan, so it’s best to confirm the total fees and charges for the life of the loan |
| Car Leasing | • Could enable you to drive a newer, higher-priced car and upgrade at the end of the lease period • If you are able to enter into a novated lease agreement you may be able to benefit from tax savings • May only require a relatively small down payment • The vehicle usually comes with a warranty, but it is worth reading the fine print to understand the conditions as they may be different to a warranty that you get when buying a car | • You could incur additional costs like excess mileage penalties, fees for wear and tear and early termination fees • You may be able to purchase the vehicle at the end of the lease period, but to do so you could be required to make a lump sum payment. Check with the provider to confirm • You don’t own the car while you’re paying rent on it so you can’t use it as an asset for financial purposes • The overall cost is sometimes higher over the long-term compared to other payment methods |
One thing to keep in mind is that advertised prices for cars may not be a true representation of the total cost you will pay before you drive out of the lot (or driveway if it is a private sale). On-road costs can add up and typically include fees for registration (or transfer of registration), stamp duty and CTP insurance, with these costs varying depending on which state or territory you live in. While they are fixed costs, they will sometimes be included in the driveaway price if you’re buying from a dealer. You may want to check with your state or territory government to get an idea of what these costs could be for you.
Dealer delivery charges can vary drastically and depend on many variables, meaning you may be able to negotiate these. To help stick with a budget, you could consider whether you could get better value from a used car over a new car. Cars with manual transmission are often cheaper than their automatic counterparts, so if you have a manual licence this may also be something to consider. If you are buying a new car from a dealer, you may be offered extras such as extended warranties, paint protection, etc. Consider whether these add-ons suit your needs and fit within your budget.
Before you drive away in a used car, keep in mind that for a few hundred dollars upfront, an independent vehicle inspection could save you thousands by uncovering potential hidden issues with a car.
Running a car can be expensive, with the total cost varying depending on the model you buy. It’s generally a good idea to factor in things like fuel efficiency, ongoing registration costs and ongoing maintenance (for example, some models may cost more to service than others due to more expensive parts or complexity in repairs).
In addition to CTP insurance, which provides cover for drivers who have injured another person in a motor vehicle accident, you may want to consider car insurance such as third-party property, third-party fire and theft or comprehensive insurance. These policies will provide a level of financial protection to cover damage in an accident. With so many options available, it’s a good idea to shop around and compare car insurance before choosing a policy to find cover that suits your needs and budget.
As you can see, regardless of which car finance option you choose, there are a number of upfront and ongoing costs to consider, above and beyond a vehicle’s advertised sale price. Before you make your final decision, it could be worth doing your research to get the full picture of what your car will cost both to buy and keep on the road.
This article is made in collaboration with Canstar, Australia’s Biggest Financial Comparison Site.
