Can you afford your first car?

If you’re considering your learner licence and need some wheels, you might be fortunate enough to have the use of a parent’s car, but eventually, you’ll need your own as you progress onto your restricted and full licences. The things to consider are:

1. How much can you afford to pay (either outright or with finance)?
2. How much can you afford to lose?
3. How long is it likely to last before it becomes uneconomical to replace?
4. How much will it cost to maintain?
5. How much will it cost to run (including anything that needs to be done immediately)?
6. How much will it cost to insure?
7. How much will it affect your ability to make money?
8. How much will it affect your quality of life.

Let’s look at each one of these in detail.

How much can you afford to pay?

You won’t need to ask many people before you find someone who has got themselves into financial stress by paying too much for a car. The first goal when buying a car is to set a walk-away budget (i.e. you’ll walk away rather than pay more). Whatever you pay must be money you can say goodbye to without causing financial hardship.

There are two ways of doing this:

1. How much money do you have already saved up that you are prepared to spend?
2. How much money can you put down as a deposit, and are you then able to fund the finance on the rest?

Before getting into any finance deal, be aware that the interest rates are often extortionate and you will end up paying a lot more than if you simply purchased the car outright; you can minimise the interest you pay by paying it off early, or choosing a higher payment amount. Shop around for finance options if you want to go that route, and make sure to ask for the total amount you will pay over the duration of the loan.

Bear in mind that if you get finance then you absolutely should get comprehensive insurance to cover it in case it is stolen or written off (the finance company may stipulate this).

How much can you afford to lose?

A car is usually a depreciating asset. This means that as soon as you buy it, it begins dropping in value, or ‘depreciating’. Some cars buck the trend, e.g. rare or collectable cars, but you’re not reading this article if you’re in the market for one of those. You may get lucky with a cheap purchase now that rockets in value (I could have bought a genuine, unmodified, low-mileage 1989 Nissan R32 GTR for less than $20,000 in 2010; try finding one for less than $80,000 now).

If you buy a car now and need to sell it in the future, how much will it have depreciated? If you buy a car for $12,000 and you expect it will be worth $6000 in three years, it costs you $2000 a year in depreciation to own it, or around $40 per week. This is money that you don’t see going out of your bank account, but is a real loss.

If you are also paying interest on a loan, it is costing you more.

How long is it likely to last before it becomes uneconomical to replace?

Many things influence the cost of maintenance on a car:

1. How hard do you drive it?
2. How much do you drive it?
3. Is it a common and popular vehicle for which the parts of easily and cheaply available?
4. What is the condition like when you buy it (i.e. has it already had parts replaced)?

Research the car before you buy it because you’ll need to know whether there are any known problems. For example, I wanted to purchase a VW Golf R and they are known to have issues with the water pump. I had a mechanical inspection which found that, indeed, the water pump needed to be replaced, so I had the dealer do that work at their expense before I paid for the car.

If you are purchasing a very cheap car, you want to avoid a scenario where the price of repairs is going to be more than the value of the car. For example, if you expect to spend $2000 a year on repairs, then would it be possible to spend $4000 more on a vehicle and one that is much more reliable over the first two years?

Eventually, a car will simply wear out and you will need to replace it. This is usually when a big ticket item fails, such as the engine, or it becomes structurally unsound due to rust.

How much will it cost to maintain?

Some vehicles need to be serviced more regularly than others. Some vehicles are more prone to breaking down (you can research this easily online). Older vehicles are more likely to have problems that develop. I recently had to replace a door lock that failed ($500) and a broken steering lock ($1100) – two totally unexpected maintenance items. You can insulate yourself from major issues by purchasing a warranty.

You will need to service your vehicle periodically.

How much will it cost to run?

When you buy the car, is there anything that needs to be replaced immediately, such as tyres? If you have to replace all 4 tyres, this could be $800, which might be 10% of your whole budget!

What is the fuel economy, and what type of fuel does it use? If it runs only on 98 octane petrol, then life per kilometre will be more expensive for you.

Also consider auxiliary costs such as parking.

How much will it cost to insure?

There are different types of insurance. It’s best to talk to several insurance companies to compare quotes.

The type of car will affect the premium you pay due to things like the likelihood of it being stolen, the overall value, and the vehicle’s type. If you’re thinking about a Mazda 6, insurance companies know that it’s a car that’s easy to steal, so you may need to plump for an alarm and wheel lock to get the premium down.

How much will it affect your ability to make money?

Many jobs ask you to have a driver’s licence, but you’re unlikely to be using it in your job (unless they are paying you some kind of allowance). This is more about whether there are things you can do with your vehicle that either make or save money. For example, if you can now bulk-buy at the supermarket because you’re not having to drag your shopping home on the bus, this means you can take advantage of specials.

Or, perhaps you can use your car in a side hustle. Or maybe it means that you can drop your partner or sibling off at their job, saving the bus fare.

How much will it affect your quality of life?

There is a value you can assign to any positive impact a car will have on your life. Does it mean that it’s easier to socialise or see a partner? Will your car mean that you can take your child to more places?

With ride sharing apps and better public transport, some people are choosing not to own a car, and that’s a valid choice. You may even choose to rent a car when you actually need one. The thing to understand about car ownership is that it comes with hidden and unexpected costs. If you can absorb these without putting yourself in financial difficulty then perhaps car ownership will give you new opportunities.