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Breaking the myths around buying a new car

May 22, 2013

Leave the buying of new cars to people who don’t understand maths, or to those for whom status is worth more than building wealth

buying a carIn the book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, authors Thomas J Stanley and William D Danko studied the behaviour and habits of America’s millionaires and found that millionaires do not buy new cars – they buy used cars for reliability, not for image. They also found that the number one car brand bought by millionaires is Toyota, not Mercedes or BMW.

When you look at the facts about the real cost of a new car, you quickly realise why these people are millionaires – they can do the maths. Depending on the model, a new car can depreciate by about 25% as you drive it out of the dealership. A large part of that is due to the 14% VAT that is payable on new cars.

Within three years your average car is worth 40% less than what you spent on it. Although there are certain brands and models that maintain their value, even a car with a high resale value can devalue by 40% in four years.

These millionaires have figured out that they can buy that exact same car for nearly half of what it cost the previous owner – it may come without the smell of new leather, but it also comes without the really high monthly repayment and insurance costs.

Not only does buying a second-hand car save you money, but it also allows you to buy the car of your dreams without signing up to ridiculous payment terms like 72 months of finance or residual payments.

If you are a potential millionaire but still hanker after a BMW 320i for example, it will set you back around R320 000, but according to Autotrader, you can pick up a three-year-old model for R180 000.

The more expensive the car, the more money you throw away in devaluation. For example even if you bought a car with a relatively good resale value such as a new Golf Comfortline, within four years your R265 000 car would be worth only R160 000 – according to current prices on four-year-old Golfs. The difference of R105 000 is equivalent to R2200 per month just on depreciation. This is the equivalent of rolling down your window on the way to work each day and throwing R100 out the window of your new car. That is just the devaluation; it does not even cover the R65 000 you will repay in interest.

The myths

Consumers use various arguments to justify splurging on a new car. We’re going to bust those myths:

My new car comes with a free service or maintenance plan

“There is no such thing as a free lunch,” says Mark Crocker, sales manager at Mastercars based at VW dealer Barons Culemborg in Cape Town. Crocker explains that the cost of the service or maintenance plan is already built into the price when dealers offer these plans on certain models – so you are still paying for it. If the model doesn’t include the plan then you pay extra for the plan; so you can just as easily purchase a maintenance or service plan for a pre-owned car.

Crocker says, however, that if you are buying a pre-owned car it is worth buying an extended warrantee. For locally made cars the costs of the warranty are relatively low, especially when compared to the finance costs on a new car.

According to Michelle Deaubreu, business manager at MasterCars you could buy a two-year unlimited mileage warrantee on a three-year-old Polo valued at R120 000 for around R4 800. So if you are worried about major mechanical issues with a second-hand car, you can protect yourself for a fraction of what you would have lost on the devaluation when buying a new car.

I save tax by if I buy a new car every five years

In fact the opposite is true. You pay more tax when you buy a new car. Over the last few years the taxman has reduced the benefits from a car allowance. If you are not keeping a logbook you may find you even owe money to the taxman. The new carbon tax that was implemented in 2010 increases the tax you pay on a new car. For example on a Toyota Corolla 1.8 you could pay a carbon emissions tax of R3 675 – this does not apply to second-hand cars. If you buy a second-hand car privately you will not pay VAT on it.

You need to sell your car every four years as it devalues

Michelle Deaubreu, business manager at MasterCars says this is not necessarily true, as the valuation of a pre-owned car is determined by many factors, such as the mileage, whether the make and model of the particular car has a strong demand in the second-hand market, as well as the relative price of new cars. In fact the bulk of the devaluation occurs in the first four years.

Another argument is that the motor plan expires and you now have to pay the running costs. As we have already explained you effectively pay upfront for your motor services when you buy a new car and if it really bothers you, you can buy another plan.

Gary Ronald, spokesperson for the Automobile Association says a motor plan is not always necessary for a locally manufactured car or one that has been a very popular model as spare parts are widely available and your costs on repairs and maintenance will be lower.

I can get a below prime deal on a new car

Occasionally dealerships offer financing deals at an interest rate below prime. What you don’t realize is that this has been financed using the manufacturer’s rebate. If you offered cash you would be able to negotiate a significantly lower purchase price.

 It is risky to buy a second-hand car

Buying a car from a shady second-hand dealer could be bad move, but there are many authorized pre-owned dealers who specialise in specific brands and who are required to maintain the brand’s reputation and are not likely to sell a car they know will result in an unhappy customer. “If you offer value for money, then your customers keep coming back,” says Crocker

You can’t get finance for a second-hand car

Banks will finance a car up to ten years of age. Wesbank says their only limitations are that they will not finance a car that was stolen and reclaimed or has been in a major accident and rebuilt. They also only offer financing on cars from recognised dealers. Wesbank also offers finance if you are buying the pre-owned car privately. According to Rudolf Mahoney, Public Relations Manager at WesBank, if one wants to buy a car from someone else, the process is quite simple. “The buyer can either apply for finance online or phone to speak to a marketer. Once the application has been approved, the buyer simply needs to submit the relevant documents to the financier. All the relevant steps are carefully explained in the process as well as the credit criteria.”

Holding on to your car for longer

If you have already bought the new car, keep it for ten years and save up for your next second-hand car which you will be able to buy for cash:

Buying a new car every four to five years:

Take for example a new VW Polo Sedan 1.4L which will set you back R168 000 or R3 500 per month if financed over 60 months.

Four years later you buy a new model of the same car. Based on inflation the prices is now R215 000.

You are able to trade your old car in for R65 000, so you need to finance R160 000 which costs you R3 190 per month or R38 280 a year.

Keeping the car for ten years:

Once you are out of motor plan, according to the AA rates your maintenance costs will be 20c per kilometer. If you drive 1 000 kms a month you will spend around R2 400 a year on maintenance costs.

Even if you take the maintenance into account, you will be saving R3 000 a month in not having to finance the car. Over the five-year period that is a massive R180 000!

If you just saved half of this each month (R1 500) for five years in an investment that earns 10%, it would be worth R131 000 – a great deposit on a new car or you could pick up a six-year-old Mercedes-Benz C-class with 130 000km on the clock for R124 000 which will last you another six years.

 

Buying a R50 000 car for cash

It is possible to buy your first car without taking on debt. If you aim to spend R2 000 per month on a car it would take you less than two years to save enough to buy a R50 000 car for cash.

Gary Ronald, spokesperson for the Automobile Association says cars are built to last a lot longer than we realise.  “We tend to believe that once a car has done 100 000 km it is not worth keeping. But cars – even those built 70 years ago – are made to last at least 200 000 miles, which is the equivalent of 320 000 kms.”

Cars that are known for their reliability include models like Honda, Toyota, Ford, VW, Volvo and Mercedes. Just look around you and you will see many older models of these brands still going strong.

You can pick up a Nissan, Opel or Toyota younger than ten years for less R50 000. If you go for stalwarts like Mercedes or BMWs you can buy one with fewer than 250 000km on the clock for under R50 000.

The key to buying an older second-hand car is to stick to locally manufactured vehicles where parts are affordable and easily accessible. You should also spend the money on a proper mechanical check before purchasing.

 

Eight tips to save you trouble

The Automobile Association provides a checklist before buying a second-hand car

  1. Always ask to see all the car’s paperwork and check the service record.
  2. Pay for a mechanical check to be carried out.  The AA can do this.
  3. Beware of dealers advertising as private sellers.  Check that the address on the registration document is the same as the address where you saw the car.  If you answer a private advert and say that you are ringing about the car and the person says “which car?” you may be talking to a dealer.
  4. Always try to negotiate a lower price.
  5. If you are not feeling totally sure and happy, walk away.  There are plenty of second-hand cars around.
  6. Shop around for the best financial deal.
  7. Set up a budget and stick to it.

Health warning
A roadworthy certificate (RWC) is not a guarantee that the car is problem-free.  It is simply stating that the vehicle meets the minimum statutory requirements in terms of safety, such as brakes, suspension and lights.  It could have a RWC and an engine knock indicating a major engine breakdown.

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Maya Fisher-French author of Money Questions Answered

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