What can you afford?

Buying a car for the first time is a big deal. Knowing how much money you can afford to spend will help you decide which car you buy.

How much will you need?

Owning a car gives you freedom, but it comes with a lot of costs. Choose a car that suits your lifestyle and budget. Get a feel for the current market value of the car you want by reading reviews and speaking to family and friends.

Before you buy a car you'll also need to make sure you can cover one-off expenses such as stamp duty as well as all the ongoing costs. These expenses will never go away as long as you have the car.

Calculate where your money is going and how much you can afford to spend on a car.

Budget planner

Once you have an idea about your budget you can now work out the real cost of buying and running a car and how that compares to your cash flow.

Become an informed car buyer.

MoneySmart Cars app

Video: Buying a car

Animated video about buying a car

Aunty B and Uncle Bob explain how to get the best deal on a car and on your loan.

This video is part of a series of animations created for the Take a minute with your money campaign.

Choosing a car loan

A car loan is a legal agreement. When you sign it you are agreeing to make repayments on the loan until it is fully repaid.

Before you sign a car loan you need to think about whether you can make the repayments over the life of the loan. Consider how secure your job is and what would happen if you couldn't work or pay the loan.

If you cannot afford the repayments you could end up in legal trouble and it could affect your credit rating. So, always get help and advice before signing a contract.

Talk to someone who has experience and has signed them before.

Find the hidden details, like what happens if you cannot make the repayments or if you want to cancel the contract, and what the terms and conditions mean for you.

Fixed rate personal loans

Car loans are nearly always fixed rate loans; this means the interest rate is locked in for the term of the loan. A fixed rate loan has set repayments so you know exactly how much you have to pay each month or fortnight.

If you make extra payments and pay out the loan early, you may be charged an early termination fee. Check the contract for this type of fee if you think you might pay the loan early.

To find out more about secured loans and unsecured loans, see car loans.

Find out how much you can borrow and what your repayments will be.

Personal loan calculator

Loans from car dealerships

Car dealerships may offer you finance when you are shopping for a car. Dealer finance may be convenient, but it's important to shop around so you can compare and choose the best loan for you.

Case study: Andy repays more than he expected

Andy took out a $15,000 car loan at 11% interest over 4 years to buy an almost new, but second-hand car.

Over the 4 years Andy paid:

  • Interest charges - $3,609
  • Stamp duty - $450
  • Transfer of registration costs - $30
  • Annual registration costs - $450
  • Comprehensive insurance - $1,523 each year
  • Petrol - $60 each week

This brought the total cost of his car to over $9,000 per year over the 4 years (that's almost $800 per month). Andy also paid for regular car servicing.

All those payments took a big chunk out of Andy's monthly budget.

Needing a guarantor

If a credit provider thinks you may not be able to repay a loan, they will ask for a guarantee that the loan will be repaid. If a friend or family member signs a guarantee on your behalf, they are known as the guarantor of the loan.

A guarantor is the person that agrees to repay a loan if the borrower can't. The guarantor will also have to pay any fees, charges and interest.

The guarantor may end up with a bad credit report if you can't pay back the loan. The loan will be listed as a default or non-payment on their credit report, making it hard for them to borrow money for several years.

Think carefully before you ask someone you know to go guarantor for you.

Problems with car expenses and repayments

If you don't make your car loan repayments you may be in default under the loan contract. When this happens, the lender has the right to take you to court to recover the money you owe.

If you don't have the money, the lender can sell any assets you listed on the loan documents as security - this probably means your car. If you default, the lender can take the asset and sell it to recover their debt.

These webpages explain how to resolve debt issues:

Case study: Tyson falls behind on his loan repayment

Tyson got a $25,000 car loan from a bank to buy a car. Unfortunately Tyson lost his job and within 5 months couldn't keep up the loan repayments. He was so embarrassed he didn't tell anyone, which only made it worse. He threw the warning letters from his bank in the bin and hoped it would all just go away. When the phone started ringing - it was the lender - he  tried to sell his car to pay back the loan, but couldn't get any interested buyers. He ended up at the doctor's office with symptoms of stress and anxiety.

He finally spoke to his father who convinced him to speak to a free financial counsellor. The counsellor contacted the bank on Tyson's behalf and negotiated with the lender to change the terms of the loan until Tyson could bring his payments up to date.

With the help of the financial counsellor, Tyson also prepared a personal budget and is now able to pay off his debts.

Related links

Last updated: 04 Oct 2018