Unless you're very wealthy with money to burn you should not be purchasing a new car especially when taking out a loan. The costs are just way too high for the average Trinbagonian to absorb. The new car smell and the big "sawatie" feeling just isn’t worth it.
The High Loan Interest Expense. Riding a wave of emotion and persuasive arguments buyers often neglect to see what they're signing up for in terms of the tremendous financial expense they will now by saddled with. Here's an example:
New Car Cost : $200,000
Down payment: $20,000
Loan Amount: $180,000
Annual Interest Rate: 12% (Could be much more)
Length of the loan: 5 Years
Number of Monthly Payments: 60
Loan Interest paid after 5 Years: $60,240
Total Payments to Bank: $240,240
Total Acquisition Cost: $260,240
In other words a car that cost $200,000 winds up costing you: $260,240 after 5 years when you finance it.
Here's where you lose even more:
Higher Insurance Cost Insurance cost is much higher on new cars and especially so when cars are financed. Once the car purchase is financed the bank makes it mandatory for the purchaser to take out a full comprehensive insurance policy to safeguard the financier's collateral. This means that your yearly insurance cost is much higher than if a cheaper second hand car was bought. Had you bought a cheaper second hand car not only would your insurance cost be lower but you could opt for third part, fire and theft insurance which is substantially cheaper than full comprehensive coverage.
Higher Maintenance by Local Car Dealers New cars purchased in Trinidad and Tobago are required to have their vehicles serviced by the new car dealer in the early life of the car. These services are required to maintain the warranty on the car purchased. Even after the mandatory services to maintain the car's warranty have passed many owners often feel inclined to continue to service their cars at the local car dealers at very exorbitant costs since they worry that having the car serviced elsewhere could have negative consequences. Its even worse if the car gets into an accident and needs to be repaired.
Significant Loss in Value Once New Cars Are Driven Out the Showroom
Reports indicate that as cars drive out the showroom they immediately decline 25 - 30% in value since the car can no longer be considered a "new car" or unused. This is a terrible personal business decision and should be avoided by the average car buyer who cannot afford such a hit against their personal finances. Moreover new cars lose 70% of their value in the first four years. When you buy used, the original owner has already taken that major depreciation hit. You, on the other hand, can get a great four-year-old car for a good price significantly lower than the cost of a brand new car. Accidental nicks and scratches in the early life of the car also have the effect of eroding the car's value much faster.
Solution: Save Up and Buy A Used Car Of course buying your car without taking out a loan will be a challenge, but its certainly not impossible. With a strong work ethic and diligence in saving and minimizing spending can help get you there. Spend a lot of time looking and researching potential cars. Look through the newspaper classifieds, go online and search for used cars, and you’ll find plenty of good cars for $60,000 or less—Toyota Corollas, Honda Accords, Civics, Mitsubishi Lancers, Nissan Sunny's.
Patience is a virtue. Your Not Doomed to drive a relatively older car forever. Say that you are thinking about financing a new car with payments of $2500 a month. Your current car is worth around $40,000. If you take that $2500 and pay yourself, instead of the bank, you’ll have $25,000 in just 10 short months. Sell your old car and you'll have a total of $65,000 to use towards the purchase of a better car, while continuing to save $2500 a month in another 10 months you'll have another $25,000 to put towards an upgraded car purchase. Repeat this process again, and you could have a $100,000 car just 30 months after you started saving. This makes much better financial sense than buying a new car and incurring significant loss in value.
But I Need A Reliable Car... Older cars have high maintenance cost and headache When you buy a new car you are paying a high premium to have a warranty / or a feeling of reliability, with all that money you pay the bank and the car dealerships you could comprehensively maintain a gently used car, more than you would ever need.
Instead use that money that would be wasted buying a new car and budget it toward car maintenance and toward your next cash purchase of a car. With a thorough car search and proper counsel before making a used car purchase you'll have an excellent chance of finding an affordable roadworthy vehicle. Though this may not be what you want to hear; deferring instant gratification has tremendous benefits. Don't be impulsive with your financial decisions.
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