If you’ve been looking on with envy at everyone out in their new 4WDs enjoying our Aussie bush, you may be ready to join them and buy a new or used car. Bill Tsouvalas, Managing Director at Savvy, has some advice to make sure you don’t get burned in the process.
Second only to a house, a car is one of the biggest financial transactions you’ll ever make. Cars will transport you from A to B, create lasting memories, and perhaps one day you’ll be using it to tow that new caravan around Australia on your next family adventure. It’s a big decision you will want to get right the first time.
Even with the best of intentions, it is easy to get burned when buying a car by paying too much, buying something you shouldn’t have, or locking yourself into finance that charges through the teeth without offering much value at the end.
Bill Tsouvalas, Managing Director at Savvy offered the following advice to buyers of a new or used car in the hope you can avoid at least some of the pitfalls.
Doing your homework
“Do your homework”; remember that old adage from school? Back then, you may have got away with handing it to the teacher just before the bell rang out, but that won’t cut the mustard in the vehicle marketplace. You need to set a budget, explore your finance options and you need to have a good idea of what kind of car you need, and ideally, what car you actually want. Do you want more storage? Do you value fuel economy over grunt? What towing capacity do you need?
With all this in mind, you can put together a shortlist of the cars that suit your needs and how much you’ll need to afford when taking out a car loan. Once you’ve got an approximate purchase price, you will be ready to talk to your bank, lender, or broker. They can then give you a rough estimate of how much the repayments will be. Remember you also need to factor in fuel, rego, insurance, and scheduled services to your overall budget.
Buying second hand? Do your due diligence
If you are looking at a second-hand vehicle, you will need to physically inspect the car and perhaps request a test drive before you consider buying it. Most reputable car classifieds provide a vehicle’s registration number and in some cases the VIN. This is all crucial information you need to check if the car has been declared a write-off, stolen, or has finance owing. You can use the Personal Property Security Register to check all this before making any sort of commitment to buy. It can save you a lot of pain and potential trouble after you’ve handed over your cash.
Scams, especially around big-ticket items, are becoming more and more common. If you’re looking at online classifieds, a potential “seller” may email or SMS you with an offer to buy a car well below the market price. The “seller” is almost always interstate and will ask for a deposit with some kind of sob story about why they can’t show you the VIN and logbook. Once they have your money, you’ll never see it or the car again. Never make any payments unless you are sure the offer is genuine. For more information, visit Scamwatch.
NOT accepting dealer finance
If you’re buying from a dealer, he/she will try to lure you in with great-sounding deals such as zero percent finance or 1% comparison rates, and so on and so forth. That may be true but the devil is always in the details, however, like gambling, the odds are never stacked in your favour. They may try to recoup their losses by disallowing bargaining, offloading later models, or slugging you with high fees. Dealer finance may be convenient but buying from a convenience store is always more expensive than going retail.
Looking at comparison rates and pre-approval
When looking at car loan interest rates, not all rates are created equal. To get a total cost of a loan (or a better approximate) you need to look at comparison rates. Comparison rates are the base interest rate as well as most of the fees and charges associated with the loan expressed as a percentage. This helps you get a more complete picture of the loan itself. With this in mind, you can go for a car loan pre-approval, which helps you negotiate a better price for a car.
Car loan pre-approval is an “in principle” approval from a lender. In practical terms, it’s a loan “on standby” that allows you to borrow a set amount of money before committing to the purchase. In effect, your loan is kept on “standby” until you find the car that suits your needs. Bill explains that car loan pre-approval gives you an upper hand in negotiation. “If you have pre-approval with a great rate, you already know how much you can spend when your broker or lender gives you the pre-approval. This is your price ceiling. Any higher, and you’re paying out of your pocket. But, this also gives you leverage to negotiate a better deal.”
When the balloon goes pop.
Some lenders may sell you a loan with a balloon payment, also known as a residual value payment. Your repayments will be lower than if you paid the loan off without the balloon however, you’ll have to come up with 20% to 50% of the remainder when the loan term ends. “If you haven’t got that kind of cash on hand, you can refinance it, but that’s just paying more in interest,” Bill says. “If you can’t afford the repayments without the balloon, consider reining in your budget and tempering your expectations.”
Approaching dealers – negotiating tactics
Timing is everything, according to the Federal Chamber of Automotive Industries, most cars are sold in June and December. That’s because dealers usually have “runouts” and “EOFY” sales to get rid of their older stock. If you aren’t too fussed with last year’s model, you can grab a real bargain.
If you can’t wait for EOFY or Christmas, approaching dealers at the end of the month is the next best thing. This is because dealers are itching to get their quotas up and will be more open to offering you a better deal. Bill says picking cars already on the lot can also be a good strategy to help you nab a bargain. “Cars already on the dealer showroom floor are cars the dealer has paid for. It’s costing them money to keep them on deck. If you can take one off them away, you’ll be doing them a favour”.
If you’ve followed the step to get a car loan pre-approval, Bill says you now have a price ceiling you can use as leverage. “A dealer wants to make a sale, the same way a footy player wants to kick a goal, or a doctor wants to cure a patient. They’ll do anything in their power to make the sale, within reason. If you’re looking at a $40,000 car and offer $25,000, they won’t think you’re serious. If you mention you’re pre-approved for $35,000, they might do a little ‘let me talk to my manager’ grandstanding and insisting you take $35,500 or something to look like they’ve scored a minor victory over you. But if you stand your ground, you can probably get it under your price ceiling.”
“Having a loan pre-approval also makes you a more “attractive” buyer with private sellers, as they know you have finance ready to go when you shake on an agreed price”, Bill added.
With your powers combined
If you do your homework and use the tried-and-true tricks of car loan pre-approval, you can get yourself behind a new set of wheels for much less than you otherwise might have.
Good luck and happy hunting.
Further reading: Ford Drops Diesels