Chris Childs

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What a car loan really costs

How much does your car really cost? There were over 18 million vehicles in Australia at the beginning of 2016 according to the Australian Bureau of Statistics (ABS), and that number is growing. Passenger vehicles, motorcycles, vans and utes – Australia has a serious love affair with automotives. We're more than willing to splash the cash required to obtain, improve and maintain them. In fact, we spend a total of almost $80 billion on our cars every year.

That's a significant chunk of change, but the true cost of owning a car can be a lot more. Personal loans are a popular option for people who want to have their car right now, but the reality is that it isn't just the principal and the interest repayments that can set you back. Let us explain why the wrong kind of car loan could end up damaging more than just your bank balance.

Is that brand new car really worth thousands more than you paid?Is that brand new car really worth thousands more than you paid?

Showing interest?

Is that new vehicle really worth up to an extra $8,000?

Every month, the Australian Bureau of Statistics records about $3 billion of vehicle loans, making it one of the most significant pieces of household debt after housing finance. Debt isn't a curse word, but it certainly can become one if you don't know how to manage it properly, and car loans are no exception.

Let's start with the obvious costs of a car loan: The interest. Users of the MoneySmart Cars app had an average loan of just over $18,000, and the average interest rate can stretch anywhere from 4.69 per cent to 15.99 per cent every year, according to Canstar. After a period of five years, you could have actually spent anywhere between $20,800 to $26,860 by the end of it!

That's the true cost of a traditional car loan, simply from factoring in interest repayments. Is that new vehicle really worth up to an extra $8,000? By saving, you are using the power of compound interest to your benefit instead of to your detriment. You won't get the car straight away, but you could be saving yourself thousands by having a little patience.

Busting your borrowing power

However, that isn't the end of the damage that the wrong kind of car loan can do. Consumer finance debt isn't just a problem for your current finances, but for your future borrowing power too. 

When considering your application for a loan, a lender will take a glance through your credit history, observing what loans you still have outstanding. If you have an expensive car loan, that immediately knocks off a significant chunk from what you might be able to borrow from a given lender.

Think of it this way: If you are having to spit out $600 a month for five years on your car, and you try to get a mortgage or an investment loan, that's $600 less you would be able to put toward your mortgage repayments. $600 a month, $7,200 a year, $36,000 over the course of a five year car loan. That could be the difference between snagging that home at auction and missing out entirely.

Could a car loan get in the way of your mortgage being accepted?Could a car loan get in the way of your mortgage being accepted?

What's the solution?

There are, of course, solutions. If you are planning to buy a car, it might be worth it to save up instead of taking on a car loan. But that isn't very helpful for people who already have a car loan; so what's the right thing to do there?

Consider consolidating your loans instead. Put your credit card, your car loan, any personal loans and your mortgage into one big pot. It makes it easier to manage, can reduce your interest repayments and gives you another chance to structure your loans the right way.

That's where the property mentors at Think Money can help. Experts in property, investment and good financial habits, they can help you turn your loans back into something that works for you, not for your lender. For more information, get in touch with our office, or come along to one of our money management seminars.