Amanda Morrall finds out why buying a new car might actually make sense and explores the downside of borrowing for those with debt

Amanda Morrall finds out why buying a new car might actually make sense and explores the downside of borrowing for those with debt

By Amanda Morrall

Buying a new car has long been considered a major personal finance faux pas made even worse of course by borrowing.

Depreciation on that shiny new car and the interest paid on loan repayments made for poor, if not stupid, consumerism.

Why buy new when you could buy a cheap used import from Japan that was still in good nick?

The case against borrowing to buy remains ironclad; however the winds of change are in the air when it comes to the economics of buying new.

Tighter control and higher standards against emissions spewing imports, discounting in the auto sector, on-going improvements in safety, and the efficiency and reliability of smaller model vehicles are serving to make a good case for dealers specialising in new, and not just for the rich.

Press motoring editor Dave Moore says there's never been a better time to buy new. The latest data on car sales supports this view.

Car sales for April 2012, saw a 25% increase from the year earlier.

'Perfect storm' driving sales

While ma and pa New Zealand have contributed to the car buying bonanza over the past year, Moore is quick to point out that the bulk of sales have been driven by commercial buyers who have been deferring fleet upgrades because of the downturn. That's had the effect of generating a striking headline figure.

"We're coming into a perfect storm where fleets and car hire companies that kept them a bit longer are going on a buying spree.''

Although the spike in new car sales may be owing to a commercial catch up, Moore said the motoring public will undoubtedly be buying new over used in increasingly larger numbers.

On one hand there is a drying up of cheap imports from Japan. That's being driven by new emissions regulations and standards. As a result, new cars will hold their value longer than usual, so depreciation isn't the curse it used to be for the consumer.

The standard "free fall" in that first year and a half has slowed dramatically, said Moore.

On top of that, advancements in technology mean that new cars are more efficient and safer than ever. Given the average cycle of a new car is four to five years, buyers of used cars older than five years are potentially trading safety for savings.

"The equipment and safety improvements in those cycles are massive and safety is sexy these days,'' said Moore.

Moore said the trend back to smaller, more fuel efficient cars has also driven down cost to the point where a good  new vehicle can be purchased for NZ$20,000.

"A car now in the mid $20,000s is now really desirable, and not just ordinary.''

Andrew Bayliss, motoring advice manager for the New Zealand Automobile Association, upholds Moore's view that "new cars have never been as affordable as they are today.''

In a recent report for AA, Bayliss compared the price of a basket of cars 20 years ago to today's prices and found little price change.

"Not only is it relatively more affordable, you're getting a three year warranty and service plan, better fuel efficiency, and improved safety.''

"So there's a lot of benefit to buying new.''

Can you have your cake and eat it to?

And the disadvantage?

The strongest case against buying new relates to financing and the interest you pay to borrow which could potentially be used to service other debt; that is, the mortgage. But can you have your new car and fast-track the mortgage too? publisher David Chaston has crunched the numbers to show the effect of a different range of scenarios.

On a NZ$30,000 loan (at an interest rate of 11.95%) over 48 months, a borrower could expect to pay NZ$813 a month. The total interest paid would work out to be NZ$8,130 not including a NZ$900 fee you could expect to pay for a finance company loan. (11.95% is probably the best car loan rate you could get, and for many people that rate will probably be higher.1)

If you put that NZ$30,000 on to your mortgage, and assuming your mortgage had another 15 year to run, then the extra payments might be as low as NZ$255 per month. For many people, a repayment burden of NZ$255 is much better than the finance company's NZ$813 per month.

What's not to like? Plenty, it turns out. If all you did was up the payments to NZ$255 per month, after the 15 years you will have paid NZ$15,861 in interest - and that is way more than the NZ$9,000 or so under the finance company option.

A smarter way would be to borrow the money on your mortgage, but up your repayments by NZ$706 per month. That way, you will pay off the car-loan portion of your mortgage in four years and the extra interest paid is only NZ$3,885 over that time.

It's even smarter to leave your repayments at the higher NZ$706 level when the car-loan portion is paid off. That would shorten the rest of your mortgage from 11 remaining years to 8 remaining years, and save you a further NZ$14,435 in interest. It's not the rate you pay, its the rate you pay it off.

Before you buy:

*Do you home work: Calculate the running cost of your car.  The New Zealand Automobile Association in its upcoming report will profile a range of models (three years old) and their related costs including registered, warranty of fitness, servicing and petrol based on an average use of 14,000 kilometres.

*Don't buy to impress. Evaluate your own needs and choose a car that meets your requirements.

*Save on fuel; having your car regularly serviced, the correct air pressure, driving the speed limit, not carting about excess, unnecessary cargo and using the air conditioning sparingly will help to save on fuel. Not being a lead foot at the lights will also reduce fuel consumption.

*Discount where possible. Use your grocery dockets to save on fuel costs or else the new AA Smartfuel card which gives you instant savings at the pump and also gives you the option to accumulate those credits which can be used to buy a full tank of gas.

*Do the math. If you are borrowing to buy, put down the largest deposit you can afford and pay off the loan in the shortest amount of time to reduce the long-term cost of interest.


Note 1: Don't be fooled by car company special low interest offers. "Special financing packages for 4.95%" and the like. They only work because the car dealer sells you the vehicle for a higher price than they otherwise would, that extra being the lost interest on the financing deal. There is no free lunch here. Car financing is a risk-related transaction and actual interest rates are 11.95% to over 20% depending on the security you can give and your income/job situation.

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I dunno, there is that something wonderful about getting into your first new car ever.  The smell, the amazing cleaness of everything and that single digit speedo.
I'm glad I did it once in my life.

I could understand the smell of leather and walnut, but plastic and foam as they are these days?

" Is your car's interior killing you ? " : Steve Parker , Huffington Post ( 11 August 2008 ) ....

Exactly! the finer details do matter when it comes to financing a new vehicle and the servicing (compulsory) contracts are exactly where they get you big time. 

No you don't have to get it serviced by them, you can use any  mechanic. 
Sometimes buying new you can get very good deals, infact better than buying on a few year old, especially during fieldday specials. We got 25% off the new car price at a field day, and it was cheaper than a 2 year old version of the same car.
The older car also may not have all the newest safety features, such as ESP.

Well, buying an old car is just a matter of choice, but I personally like to say that it is risky to relay upon the performance of a used car, and you will have to be prepared for several maintainance issues, apart from taking care of the fact that you are able to get the benfit of used car warranty.

Ivan, most of the deals these days include free servicing for the three years during the warranty period.

Firstly, wow, Amanda where did you get all that hair?! 
Secondly, I agree that new cars (particularly the smaller ones) certainly represent better value than they have historically, and that is not just because I'm sucking up to Interest's very own Rapunzel.   
As long as you avoid luxury European vehicles, you shouldn't get ripped off on the servicing.  I looked at a nice little Suzuki Swift Sport recently, $27,500 to drive away brand new.  The "old shape" previous version of this car with 5 years and 80,000kms under it's belt will still set you back $17K, with no warranty.
So that's depreciation of just $2K per year, plus running costs.  Not too bad in my book, especially given the peace of mind that you get with a new vehicle.''
Ooooh, and the new one had a better sound system.  Can't put a price on the OONS-OONS.

I still can't see a reason to buy a depreciating asset new despite all this car industry propaganda. Depreciation for cars is reducing balance i.e. most in the first year and practically none at the end.
You're also not factoring the lost opportunity cost. For example, each extra $1,000 spent on the car could have saved you $262 of interest off a mortgage at 6% in 4 years.
If you really must have a new car, buy a nearly new one privately and you'll save the 15% GST as well as some depreciation.
Car improvements are evolutionary, not revolutionary so a few years difference makes little difference.

My apologies to my Kiwi friends for referening to Stats Can instead of Stats NZ. Not enough coffee this morning. 
Also my thanks to my former colleague Dave Moore at The Press. 1) for saving me roughly $3k in petrol a year by steering me toward the Honda Jazz a few years ago and 2) for sharing his xpertise and knowledge.
Mr. Moore has the rare gift of writing well and knowing his stuff. Fairfax is very lucky to have him.

Okay full confession time.
This one time, when I was living in Sydney I went to the local car show with my brother.  It's a big enough city they bring most of the new models and it gets the boys out of the girls hair for a weekend afternoon.  I suspect my wife was glad my brother was going so she didn't have to.
The year must have been 1999 because they were showing the first release of the new Audi TT.  Anyone old enough to know will appreciate there was nothing like it in the market.  It looked absolutely stunning.  The interior set new standards for quality with brushed aluminium and leather everywhere.
Before I knew it was throwing down a deposit on the show stand right then and there.  I had to go home to tell my wife that not only did I buy a new car at the car show, but I'd put $10,000 down on a car that wasn't even going to imported into Australia for another six months!
Best car we ever owned - and I think my wife would agree on that.

And an even better second hand buy as it depreciates slowly and many have low kms on the clock

Audi TT - I thought to buy one of those you have to be a hairdresser in Oxford street ????

Wouldn't buy a new car again, well not European anyway. 
We had a new Peugeot 3 yrs ago - the whole experience of owning it was like having a mistress - it was unique, so beautiful to look at, very comfortable, great to show off to your (not knowing so well) friends, rides very well .. err drives well..but it has personality, a bit unreliable and did cost me a fortune in the long run...  Now I have a 5yr old Toyota, not much to look at but she's so reliable...
Nice hair bytheway.... beat Jacinda by miles

Whats the AA smart card annual fee Amanda?
Put that into your calculations?

There is no fee. It's FREE! 

ohh come on Amanda, what's the catch? Never a "free anything" in this world

We got the card before AA took it over and it was free - didn't pay to join anything.

Have a read of the terms & conditions, They are a laugh a minute.
I was going to highlight all the parts where they collect and share personal information about AASmartfuel card holders, to:
'(p) "Participating Enterprise” means a Participating Reward Provider and/or a Participating Redemption Party (as the case may be);'
Oops , nearly forgot the
  'agents, affiliates, related companies and service providers'
but it's there in Section 10.
Poor old Uncle Tom Cobley, he didn't get a mention.
I will however highlight this little gem.
'63. Our decision on any dispute you may have with us in relation to these Terms and Conditions is final and binding.'
Open and generous to a fault,  these guys are.
So don't worry about the fine print .     It's FREE.

If you are a member of the AA they collect such stuff already and use it I would think....flybuys, countdown etc all the same....
Interesting how cheaply ppl sell their data....
Meanwhile I get 30~35cents off at pak-n-save saves $13~15 a tank....

Recently: Brand new Suzuki Alto for Mum:   16k all up on road - auto etc.    Far better value  & better reliability than an 8 year old Jap import.

2011 Suzuki Alto automatic only 4000km - $13,500. And you could probably haggle that down a bit

Please Please Keep Your Old Car, here some reasons:
1 - it's much better economically
2 - it's much better for the environment - the amount of energy that goes into a new car is astonishing
3 - Why would you want to overtly support a corrupt industry?
Check out my blog series on this very topic
Stroke your cat not your ego

We bought a 1991 corolla (1500 manual import), with 68,000 on the clock, for 3g about a decade ago.
Currently has 280,000 thou on the clock, still singing.
Has had - 2 sets brake pads, one set shoes. One cracked manifold. Two CV joints. Two sets plugs. 2 (soon to be 3) cam-belts.
How can you compete with that? I used to rebuild my old Holden (HD X2) every 10,000 miles, and knew every bolt in it by sight. Different world. And why would you cop the depreciation in that first 68k?

It is a very nice article. Yes, its very awesome of buying a new car. There are many benefits which we can get of buying a new car.  Every one  each and every person has a desired of  buying a brand new sparking  car.  Its good of buying a new car . You should prefer a new car rather than a second hand used car. Because in a brand new car . There are many benefits and advantages  firstly, the important thing is its maintenance in second used car maintenance requirement  is many more as comparison to new branded car. Its maintenance is very less.  It has warranty   . It has more safety. In new branded car it has high fuel efficiency and low emission. So, many more advantages are there in branded car.

Vehicle crashes are become very common these days. It becomes a daily incident for every vehicle holder which is a great loss of our country as many people get injured and dead due to such incidents. Vehicles also get damaged. Vehicles are very costly and buying a vehicle is one time action, so; be careful. Give strength to your vehicle.