Your current car has spent more days with the auto mechanic than on the road. It’s time to buy a new one.
But how should you pay for it?
Traditionally, people eyeing to buy a new car opt to pay in cash. This route offers a few key advantages, including:
- foregoing borrowing costs
- absence of repayments
- and avoiding the hassles associated with applying for car loans.
However, this option does carry a few downsides. Chief of these is the effect on your budget over the short and long term. Apart from the actual cost of buying the car, along with its upkeep, purchasing a car by cash can undermine your ability to deal with emergencies and other unforeseen expenses.
So, what are the other options available for prospective car buyers?
In Australia and other parts of the globe, car finance has emerged as one of the more popular ways to purchase a car.
One of the key reasons behind this trend is the low car loan rates. But apart from this, there are a few advantages to purchasing a car via car finance.
For one, you will have the option of making a balloon payment at the end of the term. In turn, this will allow you to save more money over the long term. Second, the payment terms allow you to cover for the depreciation of the car. Once the term ends, you can pay for the remaining balance with a lump sum payment.
If you prefer to change cars every three to five years, you can sell the car that you purchased and used the proceeds from the sale to make a balloon payment. You can also choose to secure another loan for the balloon payment should you choose to keep your current car.
Credit cards can also be used to purchase new cars, especially vehicles that have low monetary value.
One advantage of using a credit card for buying a new car is that you can earn reward points.
But be aware that there are several drawbacks associated with buying a car with a credit card.
First, you have to spend a considerable amount of time researching several factors which can affect your bottom line. These include interest rates, your credit limit, and additional charges.
Prospective car buyers should also know that most car dealers levy a merchant surcharge for payments made via credit card.
Another option that you might not have considered is redrawing on your existing home loan.
Consider this option if you have a flexible mortgage that allows you to redraw from your accumulated equity.
Why should you consider this option?
For one, redrawing from your home loan allows you to avoid the hassles of applying for another loan.
Second, you can end up saving a substantial amount of money. The reason behind this is that, broadly speaking, the interest rates of mortgages are lower than the interest rates on car loans.
But just like other options mentioned above, there are a few drawbacks that you need to factor in your decision-making process. Without considering these drawbacks, you can end up paying more for your new car.
The first thing that you need to make sure is that there won’t be additional fees for redrawing on your home loan.
Next, you will need to increase your home loan payments in order to cover for the money you borrowed to purchase your new car. Ideally, you should spread the cost of your purchase evenly over the full term of your home loan. Otherwise, there is the risk of increasing your mortgage substantially.
Another potential drawback of redrawing on your mortgage is the risk of putting your home loan into negative equity. This occurs when the value of the mortgage is greater than the market value of your house.
When this happens, you will have a hard time selling your home. This is an important factor to consider if you are planning on selling your home in the near future.
Weigh all available options
Purchasing a new vehicle is a decision that shouldn’t be taken lightly. Carefully examine all of your available options, including their drawbacks, before committing to one particular option.
It also helps to consult with professionals first to identify points you may have missed during your preliminary research.
Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.