Buying cars: the worst finance habit?

If I had to describe my worst financial habit, along with a number of my friends, it would be buying cars.  A sensible financial choice around cars would be to buy a Toyota and drive it until it dies. I’m not sure I know anyone who does that. This week I thought I would compare a couple of scenarios and show the difference between a more prudent approach versus a more passionate approach to cars.

I will compare the impact on a mortgage of the following vehicle purchase scenarios:

1. Purchasing a new car for $50,000 and repeating this $50,000 purchase every 3 years with a $25,000 trade in (initial purchase $50,000 then $25,000 every 3 years).
2. Purchasing a used car for $20,000 and updating every 5 years with a $8,000 trade in (initial purchase $20,000 then $12,000 every 5 years)

In this scenario the starting point is a mortgage of $325,000 (if no cars are purchased, A.K.A. the walk/bike scenario, would mean the mortgage is paid off in 12 years 1 month and total interest paid of $135,000) the purchase of the vehicles will be done as additional borrowing on the mortgage.

• Option 1, new car purchase, would mean total interest of $251,000 paid on the mortgage and 19 years 3 months to pay off the home loan.
• Option 2, the used car purchase, would mean total interest paid of $162,000 and mortgage paid off in 13 years 9 months.

So, the difference between new car and used car is an extra five and half years to pay off the mortgage and $89,000 in interest. Not a compelling case for the new car scenario but it is always better to understand the implications of financials decisions and be comfortable with them going forward.

The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.