Liam Croke: why it pays to think smart when buying a car

After buying a property, a car is probably the next biggest purchase you are ever likely to make. And unlike a property (supposedly) a car does not appreciate in value. In fact, according to consumer reports carried out throughout the world, a new car depreciates in value by between 20% and 30% the minute you drive it away for the car dealership.

After buying a property, a car is probably the next biggest purchase you are ever likely to make. And unlike a property (supposedly) a car does not appreciate in value. In fact, according to consumer reports carried out throughout the world, a new car depreciates in value by between 20% and 30% the minute you drive it away for the car dealership.

Anyway, it is important to ask yourself a number of questions before you decide to purchase. If you travel a lot, you will probably want a nice interior, something that drives very smoothly and gives you a really good miles per gallon return.

Also, what price are you willing to pay and what monthly payment can you afford? How long are you going to finance the car for? What way are you going to finance it – lease, loan, PCP, buy it for cash?

Is the car primarily used to get you to and from work?

Do you need to buy a new car only for it to be sitting outside your place or work all day while you are at work.

I was doing some work for a company in Waterford recently and the car park at 8.30am was full of 13 and 14 registered cars, and when I left at 6pm it was still full with the same cars.

Lots of questions to consider, but you really do need to take the time and consider them all.

Because I know if I ever buy a car, I want to find out how much it is going to cost me to run it annually.

I don’t think just in terms of how much the car loan is costing me each month – I want to find out what the total cost of running the car is going to be, taking everything into account.

This is commonly referred to, in the financial industry as the total cost of ownership (TCO).

I decided to write about this subject matter this week because a friend recently purchased a new car for €15,000 and when I asked him about it and how long it took him to decide on the make and model of the car, how long he researched other similar makes and models to the one he purchased – and how long he spent comparing loan repayments – he looked at me a little embarrassed and said: “Not very long.”

In fact, it took him about 30 minutes to decide on the car; he went to one dealership and didn’t go any others.He didn’t even call another dealership selling the same car to see if they could offer him anything more for his business and he arranged the finance through the dealership as well .

They offered to do it for him and it was simple to complete a form there and then and they convinced him the rates were better than he could get anywhere else.

He wasn’t totally convinced by this but the hassle of going into his bank and filling out even more forms was something he didn’t want to do and he also thought it would only delay him getting his hands on the new car, so he went ahead.

Anyway, I wanted to look for myself, at what the real cost of this car was going to cost my friend for the next five years (he was keeping it for that length of time) because it isn’t as simple as the amount he paid for the car. And what I found was that the TCO of the new €15,000 car was treble the amount he paid for it when you factor in the initial cost of the car, depreciation, tax, insurance, interest on his loan, parking/tolls, petrol (assuming 9,500 miles each year for this which is the average amount we drive based on figures gathered by the national mileage register) and maintenance costs.

So the TCO in this scenario for the next five years I worked out will amount to €45,240.

So, my friend’s new car is costing him: €9,048 per year; €754 per month; €0.22 per kilometre; €28.90 per day of use (assuming he uses it six days a week).

The point I am trying to make here, is that if we knew in advance of buying a car exactly what the total cost was going to be we might take a little bit more time and pay much more attention to the overall cost.

And it isn’t that we don’t know what all these additional costs are – we do, but for some reason, people like my friend don’t take account of them or add them up, because if he did, he might have been able to reduce the near €30 he spends every day on his new car – if he held on to the four-year-old car he had. I worked out it would cost him €17.78 per day to run it for the next five years, factoring all the same things into account as I did with his new car.

And because his car loan had been repaid, if he continued to pay the monthly car repayment he previously had but lodged it into a savings account for himself rather than into the banks, he would have built up c. €12,900 that could go towards the next time he changed his car.

And here’s a thought, when you are going to change your car, don’t finance it for longer than you expect to keep it.

If you plan to keep it for four years take out a four-year loan, or better still, a three-year loan.

Not only will you save on interest payments but you will also be able to build up more savings in the years you don’t have that car loan repayment – and that is where you get the best return on a car – when it isn’t costing you anything in loan repayments.

The real cost of running and changing and a car every five years, costing say €15,000 from the age of 30 to 65 is going to be about €315,000. People gasp at this figure when I refer to it in presentations and of course there are certain costs that you can’t escape but you have to recognize that many status symbols like expensive new cars can be a burden, if not a huge barrier to becoming financially secure.

Do you need to carry this excess baggage?