New is not always better

2013-05-08 10:00

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Buying new cars should be left to people who don’t understand simple arithmetic, or those who prefer superficial status to real wealth

In 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 the US’ millionaires and found that they do not buy new cars. They buy used cars for reliability instead.

The authors also found that the number-one car brand bought by millionaires is Toyota, not BMW or Mercedes.

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 is due to the 14% VAT that is payable on new cars.

Within three years, your average car is worth 40% less than 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 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 high monthly instalment 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 month financing or residual payments.

If you are a potential millionaire but still hanker after a BMW 320i, for example, it will set you back about R320?000. But according to used-car listings website Auto Trader, 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.

This is according to current prices on four-year-old Golfs.

The difference of R105?000 is equivalent to R2?200 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, and does not even cover the R65?000 you will repay in interest.

Busting The new car myths

To justify the decision to buy new cars, consumers use various arguments that simply don’t hold water. We 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, the 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 buy a maintenance or service plan for a pre-owned car.

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

According to Michelle Deaubreu, the business manager at Mastercars, you could buy a two-year unlimited mileage warrantee on a three-year-old Polo valued at R120?000 for about 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 new.

»?I save on tax 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 that you actually owe the taxman.

The new carbon tax, which 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 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

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

»?I can get a deal below prime on a new car

Occasionally, dealerships offer financing deals at an interest rate below prime.

What you don’t realise 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 a bad move, but there are many authorised pre-owned dealers who specialise in specific brands and who are required to maintain the brand’s reputation.

They are not likely to sell a car they know will result in an unhappy customer.

Crocker says: “If you offer value for money, then your customers keep coming back.”

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

Banks will finance a car up to 10 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 offer financing on cars from recognised dealers.

The bank also offers finance if you are buying the pre-owned car privately.

According to Rudolf Mahoney, the public relations manager at WesBank, if one wants to buy a car from someone else, the process is quite simple.

He says: “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.”

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