How to save $8,000 on your next car

By John Cadogan | August 05th, 2010

An advertisement in Sydney’s Daily Telegraph yesterday caught my eye. It made me wonder about the value of the car company-branded finance being offered in dealerships lately. The ad in question was a Mercedes-Benz retail ad campaign designed to shift some extra metal through its Sydney dealerships, and the kicker headline is ‘It figures’. So, I wondered, does it? And, if it does, who’s the winner here?

Underpinning the ad, Benz is offering its bread and butter B 180 with ‘metro package’ (parking assist, Parktronic, CVT, 17-inch alloys, six CD stacker, cruise control with speed limiter and Bluetooth telephone connectivity) for $148 a week.

Up front, this seems like a pretty good deal. The B 180 is the cheapest (although the marketers prefer the term ‘most inexpensive’) way into a Benz since the company stuck the A Class in the neck recently, and the B Class driveaway price quoted in the ad is likewise sharp: $42,386.33. That’s basically the result of the pricing types sharpening their pencils when they decided their alphabet would start with ‘B’, and then sharpened up again for this retail special.

I’m not sure the B 180 is the car a recidivist petrol-head like me would buy with my own $42k (I’m more your WRX/Ralliart Lancer/Golf GTI reprobate) but it does offer a pretty high level of kit and the most coveted automotive badge this side of the cavallino rampante.

The finance works like this: you pay $148 a week (or $641 a month, noting that a month equals 4.33 weeks, notionally) and, after 60 months there’s a final ‘balloon’ payment of 43 per cent of the driveaway price – $18,226.12.

Having just checked online, the balloon seems pretty reasonable – current trade-in offers on five-year-old B Classes are in that ballpark, provided you haven’t used the car to circumnavigate the earth, or as bespoke accommodation for your entourage of cats. So, with average kays on board and your B Class in reasonable nick, you should be able to pay your $641 a month times 60 months, march in to your M-B dealership after five years, and have the kind salesperson take the car off your hands so you can go again in a similar (hopefully more upmarket) conveyance.

This is a simple solution to getting into the three-pointed star, a symbol to which many automotive would-be types aspire. (Same deal with BMW and Audi.) The question of whether the cheap-and-cheerful entry-level premium Euro brands represent good value in comparison to what you can get out of (say) a Mazda6 or Accord Euro for the same money is entirely another matter. But it begs the question more broadly: Is there a better way to finance your next car?

The obvious answer is: you bet there is.

This story’s not an indictment of Mercedes-Benz Financial Services Australia, or any other car brand’s tame finance company. Dealership finance is convenient. It’s a one-stop shop. The salesperson even hands you over to the in-house F&I guy (try bypassing this process at your average dealership) whose mission in life becomes signing you up. And the rate, though not the cheapest interest you’ll ever see, is hardly as extortionate as that on the big, bad bank’s credit card that’s probably burning a hole in your wallet now. You can, however, bet there’s a healthy clip on the ticket for each dealership that ‘converts’ you to its in-house financing arrangements – as well as pats on the back all round at dealer conferences for the dealerships within the brand which manage the highest overall customer finance conversion rates. That’s not a reason for you to jump on board as a consumer, however.

Borrowing against your home equity can be inconvenient – it usually involves dealing with a bank as well as the car dealer, so more of your own time is invested in the process. However, there’s really no self-serving reason for you to agree with the smiling visage on the F&I guy’s face, either – especially if you have equity in your own home, or an investment property. If you can borrow against that, you’ll get home-loan rates – which are pretty much the lowest retail rates around.

Home loan finance is for the long haul, and I’m certainly not suggesting you borrow $42,386.33 (the quoted B 180 driveaway price) and pay it back over 30 years. What I’m suggesting is borrow the dough at home loan rates and pay the $148 a week back to the bank instead of the dealership’s finance company. It makes a big difference of you do this.

If you run both finance simulations side-by-side in Excel, you’ll notice a funny thing – at the end of five years you’ll be $4000 better off if you borrow against your equity in real property and match the payments as suggested above ($148 a week). In my calculations I used 7 per cent per annum for my home loan rate.

In other words, if you pay the $148 a week into the bank at home loan rates, after the 60 month mark, you’ll still owe about $14,200 – as opposed to Mercedes-Benz Finance’s proposed ‘balloon’ payment of $18,226. That’s four grand to you, simply by virtue of paying less interest.

So, that’s how to save $4000 – just by resisting the smiling F&I guy’s persuasive talents. Some people might not have any equity in real estate, and they might have to cop it on the chin and go with the finance at the dealership. However, I think it’s fair to say that most people – not all, but most – who are in the market for a $40k-plus car have some level of investment in their own lodgings, at the least.

How do you save $8000? Simple – you combine the $4000 above with resisting the urge to trade your car in at the dealership when it’s time to upgrade. Sell it privately instead – and experience would suggest you’ll make about $4000 extra if you do. Obviously, there is some level of additional legwork involved – showing the car to intending buyers, and haggling over the final few hundred smackers. But the payoff is $4k – a hefty enough bankroll to warrant consideration for most of the people who drive a $40k car.

Interestingly, there’s an even better way to finance the car – but it involves spending about 60 per cent more per month. Let’s say you go into the deal wanting to trade up after three years, which is a good idea because owning a car (any car) outside the warranty period confers a higher level of financial risk than during the first three years of ownership. If you can increase your repayments to an even $1000 a month ($231 weekly) you’ll owe a bit under $12,500 at the end of the 36th month. The car will be worth comfortably more than that, you’d hope, giving you a handy deposit to get you cracking next time around.

Just remember that you don’t need to keep blindly agreeing with every proposition put to you when you are shopping for your next car.

Footnote: Every time I write one of these consumer advocacy pieces, it inspires several car dealership insiders to umbrage – as if suggesting consumers should look after and protect their own interests with some vigour is some sort of crime against dealership profitability. As if that’s an inalienable right. Feel free to disagree if you like – that’s what the comments section is for. Fact is, perversely, I rather enjoy reading the hate-mail…

http://www.holotropik.com technofreak

Articles like this only help to share knowledge…nothing bad about that! bugger the knockers!

Jester

Even better way to buy a car is to pay of your house, than save the money for the car – simple. Less money wasted on interest payments to the banks means more money for yourself.

Jack

Good and thoughtful article John. Essentially you are exploiting an arbitrage in relative interest rates charged, and trade in values. More power to you.

Viv Richards

Surely one would only enter a lease arrangement for the aquisition of a private car if it were an employer novated lease for full running costs with clear taxation advantages?

The other big cost that comes with a lease (either dealer finance or employer novated lease) is lack of flexibility. If you finance that B180 against your home loan or a personal loan then you can sell it anytime and pay out your financing. Take a look at the penalties in leasing contracts, to end that 5-year lease mid way through the 3rd year will be very financially painful.

Sean

But now you’ve included that little “disclaimer” they’re not going to bite…
Boo to you! haha
Simon

If a dealer is complaining “I need to make a living too” then clearly they are in the wrong industry. I have no sympathy.
My simple tips for saving money are as follows.
Rule #1. The sales agent is not, ever, no matter how much they smile and grease, your mate. Do not feel bad for them, do not feel anything for them. Do you care about the checkout chick that sells you your bread and milk? Why should a car sales person be any different!?
It’s business plain and simple. When they put the niceties on, so they damn well should but don’t ever let it sway your decision.
Rule #2, never pay sticker. Don’t even go close – they mark up the price something ridiculous. A good start point for negotiation is %20 off. Expect to get an agreement around 10% off sticker. If you are trading in, expect a seesaw with trade in Vs sticker price. If they slam you with trade in value, slam them with sticker.
Rule #3, if you are compulsive, go with someone you trust that isn’t. Dealers are exceptional at sniffing out the tire kickers from those that are already sold or have an emotional attachment. If you have done your homework and you know the market availability and pricing, it will help you walk away from a less than great deal.
Rule #4, dealers do not collect cars. Use this in conjunction with rule #3. While a car sits in their possession, it is costing them money. They are paying finance on it and it will depreciate if they hold onto it for too long. If they will get a guaranteed sale and still make some margin they will often close the sale rather than have you walk.
Rule #5. Even if you know you want a particular car, do homework on the competition. Even suss out what deals are on with the competitors cars. You may not end up with a cheaper price but you may wrangle some extras or services out of them for nix.
Rule #6, stick to your guns. A good sales person will try to get you to compromise or move to what is favorable for them. Bearing this in mind, set yourself limits. If they are exceeded, leave. You are mad if you think there will never be another opportunity, another dealership or another deal to be had. Car dealers know this and will often be more responsive as you leave without a deal.
Rule #7, don’t reward bad sales people. Bad sales means bad service and this could really hurt you if something is amiss with your new purchase.
Happy shopping and good luck!

Matty B

I like #7, because I love how everyone seems to have forgotten the principal of you get what you pay for. This includes service as well.

I work in the car industry, and you know what, the happiest customers I’ve ever had, I made the most money from. But also went out of my way to make everything too easy, and an enjoyable experience. There are dealers out there who pay some sales people as little as $50 for the privelige of serving customers like yourselves.

So next time, when you start going in and trying to make things difficult for yourself and the sales person, ask yourself, would I put up with this for $50 ? And don’t sit there saying money is everything, because unless you’re sitting in a KIA showroom, there is obviously a small part of you that understands, YOU GET WHAT YOU PAY FOR!!!
http://carAdvice The Salesman

Answer to rule #1

God forbid the salesperson tries to make buying a car a pleasant and enjoyable experience.
Dealers are rated on customer service by the manufacturer. If the average CSI (Customer Service Index) falls below a satisfactory level the franchise could be removed from that dealer. It is very important you are satisfied before, during and after the sale.

Answer to rule #2

We are one of the few industries of this size who will negotiate and share our margin. Would you prefer you buy a car from a Coles, try to get a discount off your next weekly shop.

Answer to rule #3

If the dealer is willing to let you walk then there is no deal.

Answer to rule #4

Completely agree. Best deal is oldest car in stock.

Answer to rule # 5

Completely agree. Dealers would rather haggle on accessories than give discount.

Simon

Speaking of customer service index, When I bought my new car a couple of years ago the service was woeful. They wanted me to rate them well. They told me they get factory bonuses with high scores. I told them I was disgusted with their service, so low and behold they didn’t get me to fill out the survey.
So just because manufacturers think their dealers are providing good customer service, does not mean it is the case. I don’t think it’s too difficult to assume they forged the survey or just didn’t submit it.

http://carAdvice The Salesman

That’s disappointing. You could take your concerns straight to the regional office. I am sure they would like to know about your experience.
Ask CA for my e mail address and I will help.
Matty B

Fair enough, if your expectations aren’t being met, pass on the message. But maybe next time, if you do find a helpfull salesperson, work with them a little bit and make sure you not only get the price your happy with, but the service you deserve.

Because you know what, it doesn’t matter what you paid, someone else would have got it cheaper some where else. Whether they saved a dollar or a thousand, as long as you’re happy with the vehicle, the price and the service, do business.
Eric

The Manafactures send out the SURVEY’s not the dealer.

Simon

Well Eric, if that’s the case then clearly the dealership did not pass on my address to the manufacturer. Hardly surprising if that is the case.
Eric

If thats the case, the manufacturer may not have set up your warrenty ect.
I would call them and clear things up.
Jon

Actually, a market research company sends it out on behalf of the manufacturers. I used to work on the CSIs for most of the largest car companies when I was working for this research company.

Gavjon

You absolute goose. These people are allowed to make a living you d#*k head! just as there are bad doctors, bad lawyers, bad nurse’s, bad teachers, there are also bad Salespeople spurred on by idiots like you that make there life hard. I can only assume by the comments you have made that you are no good at your Job either, and therefore need to bag everyone else and bring them down to your level. Although I am not a car salesman, I do work in retail management, and appalude all salespeople that have to put up with D#&kheads like Simon….

Jester

And why is Simon a “d#$%head” – is it because he tells it how he sees it. Listen Gavjon, people like you make me sick, I prefer to say what I mean and simon prolly prefers the same, instead of just smile and tell car-salespeople they did a great job. So far I’ve met so many junk car salesmans that I really do not think there are any decent ones and I’m completely turned off spending my 80K on a new car due to retards in many dealerships, or at least I haven’t met any decent ones working in car dealerships selling your run-of-the-mill sub-60-70-80K cars. These people are all full of BS, telling BS stories how there’s no money in cars, how they barely break even if they sell a car for RRP, etc, etc.

Paul

Well Jester there isn’t a great deal of profit in new cars. Used cars yes, but not new cars.

On average, the new car dealer I worked for would run at an average $400/car loss. Yes at full RRP they’re making money but as everyone says, only a very small handful of times in my 4 year career did I come across someone who paid sticker. When you’re selling Toyotas, every man and his dog is shopping you and so we were encouraged to sell volume over profit.

The money for these dealers is in the finance, aftercare, servicing and parts. New cars are so they can have the franchise rights to do servicing and distribute parts and when you’re dealing with domestic brands (Toyota, Nissan, Mazda, Ford etc) they are paid volume bonuses and incentives.

So yeah I got paid $50 a car and the shit I had to put up with at times particularly from ignorant customers is why I walked away from it long ago. I wasn’t a shark, I was doing a job to pay for my family. But with 60 hour weeks, $50 commission per car, no control of stock or marketing and working with low expectation idiots who failed elsewhere so they came back to cars just did it for me.

The dealer principals and manufacturers are making the cash, not the sales people hence why the industry attracts shit sales people. Anyone who is a professional and high performing sales person isn’t selling cars.

I completely agree with his article and if I only had the space to write the stories and culture that I experienced regarding customers etc, it would make your skin crawl.

How does ‘just bury the f**k until his grandkids are paying it off’ sound as something that was told me when I first started selling cars? It’s a perverted industry.

Simon

Paul:
I take your point that it’s not an easy job with the long hours and poor pay. But as you are aware, anyone worth their salt as a sales agent will not work under such arduous conditions. They will find employment elsewhere and make a living. This comes back to my argument. It’s not personal, it’s business so I don’t believe anyone buying a car should take pity on anyone selling a vehicle. Otherwise it’s a charity and I seriously doubt any car manufacturers should be regarded as charity.

Gavjon:
you are welcome to post your angry sentiment. No one is suggesting you are not entitled to make a living. By the same token, no one is responsible for you making a living. From what you are saying I think you ought to try a new career. If you can’t put up with the heat, time to get out of the kitchen.

Axle

Good article. Should name and shame the dealerships who object to informing the public of their options.
Sam 300TD

I have always been against borrowing to buy a car unless its for business. That’s where it starts and stops for me.
Andrew M

I think it should be noted that drawing equity from an investment property can cause tax complications.

Also, this doesnt exactlly use a straight forward car loan as an example. I mean how many private buyers choose a loan with a balloon???

I think this type of article is informative, and infact, I did a similar thing 1 months ago, but I think the excercise should have displayed a situation closer to the average buyer.

On the plus side, you should also mention that not having the vehicle on a secured loan will also result in insurance savings

http://carAdvice The Salesman

Some dealers offer walk away insurance. If you can no longer afford the payments you can return the car and the dealer will pay out the differance (Value to Payout) to the finance company. Try doing that with the bank.

Aleks

My #1 Rule, don’t finance a car, stupidest thing you will ever do.

Micky

110% agree with you. Save up, buy outright with cash, and save money. Financing/leasing = throwing interest down the drain.
KM

Yes blow your hard earnt cash into a depreciating asset. Smart move that one.

Micky

What’s smart is having an asset that you fully own, can be proud of, and that you can sell at any time if worst comes to worst. Owning outright isn’t just about saving money it’s about flexibility and not having to rely on an income coming in to pay for your vehicle.

Hung Low

What is smarter is borrowing to leverage an appreciating asset…full stop!
Matty B

So lets say, as per the vehicle in the article. Got $40,000 sitting there ready to go. Why not put $10,$15 even $20K in as deposit, get a flexible secured loan that you can pay out with no early fees, (they’re out there) and put the rest of the money in the bank. That way if things do change, you can easily offload the vehicle without worry of a shortfall. Or lets say you need to find a few thousand dollars for an unexpected bill, it’s in the bank.

And you might even make a bit of money on the cash sitting in the bank and have true flexibilty and peace of mind.

Money Makes Money, Cars Don’t.

Micky

If all you have is $40k sitting in the bank, then you are not going to be in the market for a $40k car, are you? You might buy a $15-$20k car. You will still have plenty left for a “rainy day”. I never said to spend ALL your cash on a car. You obviously need to balance it out. But that still doesn’t change the fact that it’s smarter to buy outright. It is simply the easiest and least stressful way to go.
Andrew M

Or better still get a loan with a redraw facility then you will effectively earn higher interest on your savings, and wont get taxed on it as you techniclly havent earnt anything.

The money is still there if you need it, but it will save you interest until you do.

One of my houses has 40cents owing on it, I havent paid it out so that way I have access to money when I want it, and it costs me nothing for the access

Paul

hmm depends on what you’re buying the car for and how you finance it really.

Most people as domestic consumers who are full time employed and paying for a family car with post tax dollars, yes certain finance arrangements can be very constricting.

For a business owner who is depreciating a commercial vehicle with pre tax dollars and writing off the interest, would be a fool to buy it outright and kill working capital and cashflow.

Buying outright is just crazy because that’s 20, 30, 40k that is tied up in a depreciating asset that you could be generating income with.

Obviously there are people from different vocations and financial positions here so it’s best to talk with your accountant as they will provide you the best advice based on your circumstances to minimise tax and risk and maximise working capital.

TomJ

Id like to see an article on the pro’s and cons of leasing.

Micky

When I was in the USA I saw Lexus IS250′s advertised for $199 a MONTH on lease (that’s $46/week). That’s not a typo. And Mercedes want $148 a WEEK for a B?!

Simon

The US official rates are at 0.25%
So finance is cheap in the USA, if you can get it.

Micky

Yup. Also saw Mazda3 (previous gen) for $99/month.
Yonny

Yeah, finance is cheap in the USA – and look where it got them.

Fenno

and thats why we had a GFC.
Simon

Sorry, but low interest rates were not the cause of the GFC but the result of the GFC. Unregulated lending and dodgy financing were what caused the problem.
Fenno

Reply to Simon (below)
Low rates and easy finance was the result of 9/11 to bring back buyers condfidence in a very shaky economy. The GFC was a result of many of those loanees not having the capacity and the backs underwriting over valued properties.

Getty

I think this is the most intelligent piece you have written in a long long time….

I save even more, buy the car outright and shop it dealer to dealer till the last dealership is bleeding from being so hard on them….

http://carAdvice The Salesman

No dealer will sell you a car unless they make some profit. How do you know they are not still makeing thousands from you?
Eric

I would not sell you a car if that was your game.

Your the type of buyer tends to give the worst CSI, will not service the car with us, but parts ect. Wants everything for nothing.

Plus are also the most time consuming that will NEVER be happy.

Eric
Simon

Actually I thought his article about cash for clunkers was great too. Talk about an inconvenient truth.

Micky

Mercedes-Benz is offering a “metro package” ? Is this because metrosekshuals (sic) are the only ones who buy B-Classes?

Andronicus

I think even the metrosexuals have better taste than that…

NacaYoda

I agres with others above, how many $40,000 private buyers elect for a balloon payment?

How many $40k car people set out in life, to pay $$148 a week for the next 60 months, just to sell the car back to cover the purchase price and then get a new one, to continue to pay $7,696 every year (before insurance, servicing and petrol)?

I think most private $40k car buyers, buy a car on finance with the intention of owning an asset in 3-5 years, outright. Not intending to tread water.

I could be wrong.

Matty B

From my experience, more do then don’t.

Rick

John, there is one point that punters should be aware of and that you missed in your example. All of the car company CHP / Lease rates are fixed interest, whereas using home equity or taking out a home equity style loan will be variable. With upward pressure on interest rates, this should be factored into any 5 year period as this can make a BIG difference to the outcome.

Simon

True, unless they have a locked in rate……….

Andrew M

which in that case would more than likely be higher than the current variable.

But either way, home loan rates will still always be higher

Simon

Serious? On a depreciating asset? Fair enough but very surprising.

Andrew M

Sorry, I meant “home loan rates will always be cheaper” not “higher”

Reckless1

Hmm – a car journalist giving financial advice….

I thought a Financial Services license of some sort was required for that.

I don’t have a license either, so I don’t give dubious advice on how to obtains a thing which you can’t afford, by fiddling finance.

I pay cash for all my vehicles, and if they are for business I depreciate them.
As a private buyer I have an opportunity cost of lost interest due to spending the lump sum – but it’s better to forgo taxable interest earnings than pay interest which is not deductible.
NasalExplorer

The point is that there are ways to keep money in your pocket that car buyers may not necessarily be aware of. I learned something from the article, so it is of some use to somebody, at least.
NasalExplorer

It’s not advice, it’s an opinion.
http://Mitsubishi NasalExplorer

Okay. Here is what I learned:

I have always been averse to drawing on house equity to pay for a car, because I thought, as the article pointed out, that is doesn’t make sense to be paying for a car over 30 years, when you probably sold it after 5 years.

It had not occurred to me simply make extra payments to the mortgage over the same period as a regular car loan would have been to clear the draw-down and take advantage of the lower interest rate.

That may have been obvious to you and many others, but it hadn’t been to me previously.

And I learned that there is more than one way to keep money in my pocket and not let car salesmen have it.

http://carAdvice The Salesman

Fair Enough.
You should also conceder the disadvantage of putting a depreciating item on an appreciating asset. Johns recommendation only works if you stick to the payment plan.
Final point is the dealer might offer walkaway insurance. If you can no longer make payments on the car you could hand it back to the dealer who will pay out the difference. This would mean your credit rating would be clear. You can not do that with a bank.

Simon

….and they take their pound of flesh for the priveledge.
With redrawing on equity to pay for a car, you also have the option to pay the car out over a longer period. While this is not necessarily ideal financialy, if someone is desperate for a newer vehicle it will let them get into one. I have seen this with some neighbours. He had a stroke and she needed to be the breadwinner. Their old car was tempermental and difficult to drive. Now on one income they can afford to have a newer car suitable to accomodate his wheelchair and still manage to pay the bills. This simply wasn’t an option with any other finance.
Andrew M

T/S
Banks do offer the same sort of loan insurance, but in both cases you will be paying for that extra security.

I think I got conned to tick the box on my first ever car loan, and the premium was quite excessive. To their credit, when I paid it out, they worked out the premium pro-rata and paid back the years worth that I was early in paying it out.

In my last vehicle purchase I politely visited the finance guy. Not only was the car yard finance higher than my bank, but the fees (especially for early pay out) were ridiculous.

I think you should realise that the dealerships dont finance the vehicle themselves before you start to say banks cant access the same sort of insurance schemes

laurie

Can someone here please explain why I continue to hear the change over price is very important I thought that is always the case but someone tried to explain to me they may give me nothing for mine then lower their price or they give me heaps for mine and increase their price!!

laurie

http://carAdvice The Salesman

It really doesn’t matter what the new car price is. You know you can negotiate something from the dealer. If you are trading you might find the dealer will be more flexible on change over. Especially if you are trading a car the dealer would like to keep for their used car yard.
Matty B

Think of it this way, if you’re buying a $30,000 car. You’re car is worth $1000 to the dealer lets say. Would you go with the dealer that gave you $2000 for your trade, or that gave you a $1000 for your car, and a $1500 discount? %

Scenario 1 = $30,000 – $1000 – $1500 = $27,500 Change Over
Scenario 2 = $30,000 – $2000 = $28,000 Change Over.

It’s like interest rates, look at the payments on the amount, not the rate. What’s the point of borrowing $30,000 at 6% with one lender, if the other lender is 9% but has lower fees and is $5 a week cheaper becuase of it?

MK

1. Bank – Lets convince people to borrow money to buy a house, boom there goes house prices.
2. Bank – Lets convince people to borrow money to buy cars, boom there goes car prices.
3. Bank – Lets convince people to borrow money to buy lots of stuff they don’t really need, boom their goes credit card interest rates.

Banks love: 1. stupid people, 2. who are willing to work for them, 3. for their whole life.

Simon

If you have super, which you will if you are working, you probably have some of that money invested in the banks. If they turn a profit, and all aussie ones do – your super will grow. HOW they turn a profit given they caused the GFC is another, frustrating matter……….

Andrew M

Not all working people have super.

Keep in mind some self employed people dont have to pay super. Ive got bugger all super, Ive put my money into my own portfolio rather than having someone else control how much i lose and then charge an administration fee for the priveledge

http://CarAdvice The Salesman

I want to learn more about that. Where do you get started?

Andrew M

Are you being sarcastic??
If not Ill clarify what I mean because I think you may have misinterpereted.

My situation is I am self employed. It is not mandatory for me to contribute to my own super fund. I have never made a voluntary contribution to a super fund, and what im saying is that I value the investment in my own wealth as a better option than placing 9% of my income into a super account.

I personally think the super laws should be changed in a way that the employer contribution of 9% should be allowed to be put into approved strategies other than a simple old super fund which now days is a big deal in lining various funds pockets.

Super is big business nowdays, and I think its really getting beyond the joke when the fund competes to put their paws on a share of your retirement.

I could come up with many better proposals than the current scheme, and I am lucky in that I dont have to put my hard earned into such a scheme, and I can manage my own path to retirement and know what I put forward today will still be there at age 65

Dan

You seem to be a bit misinformed as to what super actually is.

Superannuation is not an investment in itself, it’s just a vehicle through which you invest. Just like a company or a trust. You can do exactly the same investments that you do in your own portfolio, but through your own super, and be taxed less on the profits, than you would have been otherwise. I’m talking about self-managed superfunds of course.

parker

What happened to the A-class?

Fenno

Hit a moose.

My turf

John you are right again !!!! You are soo much better using the equity in your house to buy somthing that is going to go backwards in value at a massive rate of knots !!! rather than another property or something that is going to continue to improve in value. As for the dealership finance versus Mortgage re-finance, Make sure you read the terms and conditions of both, the dealership finance will have maybe 1 or 2 pages the Mortgage re draw will be more like 10 to 20 with a lot more little clauses and penalties. remember to get advice from a impartial 3rd party (accountant etc) before making a decision. John Cadogan does not count, neither does a Finance manager in a dealership.

My turf

Also John why raise this particular point now ? When Audi and Lexus have been running their very shady 4.9% offers for a couple of months . I know the argument about subsidised rates is completely different and in my opinion a far more deceptive way of selling car finance
Simon

Actually, I did what John is suggesting a with my last car purchase. The bank were more than happy to lend me the money, I didn’t need to fill out any paperwork. The manager did it for me and all it cost me (apart from principal interest obviously) was a $20 redraw fee. Your argument makes no sense. If you need finance for a car you would go with the arrangement that costs you the least. When I bought my car the dealer asked me if I’d like finance. I asked him if he could beat 6.75%, at the time he couldn’t get it below 10%.
I saved lots by using the equity in my house.
Not that I’m against sarcasm, but next time you bring it bring some intelligence too.

Andrew M

Simon,
I did the same thing with my last vehicle purchase…..straight out of the redraw.

But consideration must be given that an equity loan is different to redraw. That will cost more than $20.

http://CarAdvice The Salesman

Andrew. M
No Sarcasm. Genuine interest. Lots of talk about super on all media latley.
Simon

Sorry, you are right. I didn’t draw on equity, I drew on my advanced repayments. It cost me $20.

The Dazzler

You should try a comparison where you save the full price upfront and earn interest while you save, against any kind of finance. The gap is huge.
Not that I’ve actually ever saved that much myself. If only we didn’t give in to instant gratification.
Great article.
Dave

Financed an XC90 in 2005 for 36mths from my Bank (easier than the dealer as they have my history), paid the balloon in 2008, still have the car today, picked up the tax deductions along the way…all good.
Have 2 other cars both $35K+, paid cash and picked up the depreciation and GST benefits which you don’t get with finance.
Horses for courses, there is no wrong way, just fight to get cheap rates, and lease/HP for no more than 36mths IMO.

Dan

You’re completely wrong. You can get depreciation and GST benefits when you use finance.

Paul

Agree with Dan. In fact you can also claim the interest if it’s a business expense.

Tomcat173

I found the article interesting – particularly because I went through the same process when buying a Golf GTI. Even a particularly sharp interest rate from VW Finance was not enough to outweigh the cost of refinancing the mortgage.

Any economist would tell you its all about opportunity cost. Obviously the cheapest option is to pay upfront, but if you minimise the interest incured via financing, and maximise returns made investing, then you’re onto a winner!
Nickoshubin

Pretty interesting article by CA.

And it works in theory, but how many people are disciplined enough to make the extra repayments when its not compulsary.

Another thing to note, imho, its not the best idea to put a depreciating asset on your home equity when it could be spent towards more appreciating assets. And, buy putting it on your home loan the car is secured against the home. If you were to go through financial stress and can’t afford the repayments, you run the risk of loosing your home through default rather than just your car…

As mentioned above by afew people, its abit risky putting out financial advice when your not a financial planner & don’t know peoples circumstances.

FYI, i’m a mortgage broker by profession and I don’t deal with car finance unless its specifically requested by my clients, I would earn more if they attached it to their mortgage!!

Andrew M

Nickoshubin,
If you refinance using the equity in your house, the vehicles arent held as security.

I dont feel it matters whether its a depreciating asset or appreciating asset thats being put on the loans, either way you will have to finance both items, attaching them in some way will save around 4% on the vehicle finance

Jonno Smith

With any Big Ticket purchase, do your sums first!
I have a few things that I have problems with the article. First of all, a house is an important asset and aspect of one’s life – having a roof over one’s head. However, a car is a discretionary item and is in fact a wasting asset or equipment. To lump the two together is to increase the risk exposure of default if one loses his job or is unable to work. There are many stories of home owners using their home equity to borrow money for purposes which is considered non-economical. When they come to a crunch, they are forced to sell their homes. It would be better to separate the two in case of contingencies, you could always jettison the car but move to protect your home from foreclosure. $4k is not the issue but rather the risk of losing one’s home should be the issue.

Cheers!

Andrew M

Jonno,

Lets say you have a house loan @ $300,000 @ 6% interest
Lets say you have a car loan @ $30,000 @ 10-11% interest

You still have $330,000 of debt no matter which way the loans are set up.

Lets say you put the car on the house loan, you will have a loan of $330,000 @ 6% interest.

If you get into hard times, you can still sell the car and put that money back onto the loan.
Lets say you can only sell the car for $15,000.

That means you will have a loan for a house only at $315,000. IMO thats a better situation then having to sell your car and then having……
House loan @ $300,000 @ 6%
A car loan for a car you dont have @ $15,000 @ 10-11%

The risk isnt higher by lumping 2 loans together because the financial responsibility doesnt change

Reckless1

That’s just re-arranging the deckchairs…..

Andrew M

My point exactly

http://www.zenra.com.au Shannon

Sadly, I have seen many a client, whose money gets tight and they have the $30k car inside the mortgage. Instead of the mortgage + the car pmt, they fall back to the min mortgage pmt.

They decide to change cars, accepting the dealer trade offer, drop the amount in the mortgage and wonder why they owe more than they started with.

I can’t see that financing for a car, or popping cash, either way, you have just bought something. And good chance is being a car, that its not going up in value.

Finance it, pay the interest, aim to have a residual that will be paid by the sale of the vehicle. You still have the cash & under novated lease, a tax deduction that most people can’t access.

Jack

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”

Attributed to Thomas Jefferson.
Mythfrances

Wait…So according to the article, you will pay 641×60 + 18226.2 = 56686.12 in the end for a MB B class that its driveaway price is 42386.33? Isnt that a loss of $14288.79? (it will be a bit less than this number since I didnt count in the potential interest u can earn with the driveaway price.)

And certainly there is no way u can earn $14288.79 of interest from $42386.33 in 5 years?

Isnt it a very bad idea to get a finance then?

Reckless1

There’s an old saying – “Never a borrower or a lender be”

In my old fashioned view, financing leads to disaster eventually.

There’ll be howls of disagreement from others on here, but the GFC is the most recent example that disaster strikes when financial loan packaging gets so extreme no-one knows who’s up wh for the rent any more.

Howl away folks, the truth is, how many people who had cash in the bank were shitting in their boots when the GFC hit, until the Gov’t guaranteed bank deposits?

That action saved Australia from a run on the banks, which would have been catastrophic.

And remember – all the GFC problems arose due to clever packaging of debt. This article is about what?? Oh yeah – clever packaging of debt

Jack

Fantastic analysis Reckless1. That feeling of sheer terrible awe, knowing that the banks, um, needed a guarantee, (nicest way to say this…) will live long in my heart. Once banknotes were redeemable in Sovereigns!

To answer something you didn’t ask, just look to the future to see how the wrecked balance sheets are repaired: another bubble. A superb article by Erik Janszen entitled ‘The Next Bubble’ is out there on the net. Maybe it will be inter-bank swaps on derivatives on Carbon Credits on a tree somewhere in the Wimmera that brings us down next cycle…

Ryan

You want to save money on car finance? Get a novated lease! Enough said.
Paul

I think there’s merit in everyone’s comment however I’d like to add my bit now.

1) Everyone has a differing financial position/history/outlook. This is why an accountant is as intimate as your doctor and what you do and how you choose to do it should be your business only and discussed with your accountant

2) Cash vs finance depends on the vehicle, for what purpose, to what outcome, based on what value, etc

3) There is negative debt and positive debt. Despite impassioned points of view, most people in the world do not have spare buckets of cash (for whatever reason) and will require financial lending at some point in their life. It pays to know how to play the game rather than be a victim of it.

4) It’s all about value perception and perception is reality. Some people buy Lambos and others buy Kia Sorrentos. What works for you might not work for the next bloke so it’s a bit broad to say ‘do this or you’re an idiot’.

Best of luck with financing a car. I do agree about the questionable value of dealership packages, but hey it’s like a servo pie. It’s targeted for those who know it’s not good for them but are hungry now and can’t be arsed even knowing they’ll probably regret it later. Why? It’s convenient.

And we’ve all eaten a servo pie at some point.
http://www.ahg.com.au Tyson

To Be honest John,

I would have liked a reply to my last bit of mail I wrote to you.

Do so, and I would be happy to give advice or insight into your next exceptionally well written article.
areyoureadybaby

I think this article is common sense.
My condolence to aussies.
THe financing rate here is fuking ridicuous.
you pay more than 10% P.A for a car.
5 years its like 50% of what you borrowed.
So sad.
Feel sorry for you guys.
I think the current prices of cars should reflect the current value of aussie dollars.
its a shame that dealers do not pass such benefits.
Banicks

Never, ever, purchase a car using finance.

I couldn’t find in this article where to save myself 8k.
Nath

what stupid advice.
as if the bank will give 7% on a mortgage re-draw, and why would you anybody want to risk their equity in their home , by buying a car?

Just finance the car at 8.5% and have no risk against personal assets and tax deduct the entire thing?

Also, why pay “cash” for a car when the car will be worthless in 5 years anyway? use that money to invest in real estate and you will probabaly double or triple your money. While all the losers who paid “cash” for their cars go nowhere. Financing actually makes complete sense. The wealthiest people always finance their cars pre-tax.