How to avoid paying twice over for your new car

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It pays to do your calculations before you start, because the method of payment you choose to buy a car can dramatically alter the total cost to you.

There are several ways you could buy a used car with a price tag of, for example, $10,000 and also $3,000.

VEHICLE FINANCE

You’ve found the perfect car for your situation – a 2008 Toyota Wish – for $10,000. You obtain a car loan at an interest rate of 12.5% (depending on a person’s circumstances, fixed annual interest rates would normally range from 10% to 16%). For a 48 month term, you would be paying back $274 per month for a $10,000 price tag, giving a total sum of $13,152 to pay before you own the car outright ($3,152 in interest).

By comparison, take a 2001 Nissan Bluebird Sylphy for $3,000. On the same criteria as above you’d be paying back $93.43 per month, with total of $4,484 paid in the end ($1,484 in interest).

CREDIT CARD

If you decide to use your credit card to buy the car, with an interest rate of 17.9% (Kiwibank Mastercard – Gold) you would need to pay $293 per month for 48 months, including $4,075 in interest. It pays to do your homework, there are credit cards with much lower rates, such as the BNZ Low Rate Mastercard at 13.45%.

The $3,000 car, at the same rate, would cost $88 per month for a total of $4,223, including $1,223 in interest.

Credit card transfer balance offers are always tempting (0% pa for 12 months), and seem like a way to beat the system, but requires extreme discipline and can often backfire.

HOME LOAN

It’s always a temptation to put a big ticket item on the mortgage. New car, new boat, new extension, no worries – just stick it on the mortgage.

Many homeowners will find that they are able to borrow against an increase in equity that is a result of a recent rise in house prices. Others might view historically low interest rates as a pull factor in deciding to finance a new vehicle with a sub 4% interest rate mortgage extension.

In spite of these positive factors, the unwary borrower could still inadvertently end up paying nearly the entire price of the car over again in interest.

The way of financial pain
Simply increasing your existing mortgage can add an eyebrow raising amount of additional interest to be paid. For example, putting an extra $23,000 onto an existing 25-year mortgage would mean an additional $62 to pay per fortnight with a whopping $17,314 in additional mortgage interest to pay overall.

The structuring of your borrowing is all important, please get advise if you are considering the home loan option.

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