Cars are most people's first or second most expensive "asset" - first if they don't own their own home. Yet there's nothing like a shiny flash car to blow people's logic to smithereens.
Mortgage brokers, budget advisers, banks and credit unions see people make awful mistakes when financing their cars. Sometimes it all ends in tears when the car is repossessed.
I've never been able to understand why people want to buy more car than they can afford. But I'm the odd one out.
Graham Roberts, chief executive of Turners Auctions, says industry research shows more than 80 per cent of car buyers do it on credit. "This may be by adding the cost to your mortgage, bank loan, a customised car loan, or other methods of borrowing money," says Roberts.
Many buyers take whatever the car yard offers in terms of finance. This is rarely the cheapest form of finance. Car yards sometimes make more money from hire purchase arrangements than they do from the vehicle itself.
A cheaper option is to extend the mortgage - if you have one - says mortgage broker Stuart Wills of MortgageLink West. There is, however, a right way and a wrong way of putting the car on the mortgage.
Many people simply top up their mortgage over 25 years for the cost of their car. If they have revolving credit they don't even need to go through any formal process.
The problem with this is that they'll be paying interest on something they'll only own for three to five years.
Floating mortgage rates are around 6 per cent and car or personal loans from banks, building societies, credit unions and finance companies are mostly between 13 per cent and 18 per cent.
On a mortgage, borrowing $20,000 to buy a car at 5.99 per cent costs:
* $23,193.78 over five years
* $38,621.42 over 25 years.
Ironically, if you were to pay 17.95 per cent, which one bank is charging at the moment, over five years you'd be better off than putting the same amount of money on a 25-year mortgage. The five-year car loan would cost a total of $30,439.48, which is more than $8000 cheaper than putting it on a 25-year mortgage. I should say that these sums don't include fees.
People who have financed a car over 25 years can remedy the problem by simply increasing payments and paying it off sooner, says Wills.
Another mistake home owners make, he says, is to take out motor vehicle loans with their bank. If the motor vehicle loan is with the same bank as the mortgage, the bank will secure the loan against the house anyway. So why pay two or three times as much in interest rates for a car or personal loan when you could put it on the mortgage for the same period?
It's a good idea to get finance pre-approved before going shopping for a new set of wheels. That gives flexibility to buy a vehicle privately or at auction instead of being limited to a car yard. Credit Unions often take a different approach to their customers than banks do and I was interested to hear NZCU Auckland's approach to lending money on cars.
If the customer is what car dealers call a "wooden duck" - that is, they haven't negotiated the price - a staff member will call the car yard and do the dirty work for them. "We ring them up and say, 'this is all we are prepared to let our customer pay and this is the finance'," says Rob Collins, NZCU Auckland general manager. "A lot of them hate us."
Collins says a surprisingly high percentage of Kiwis pay the window or asking price for a vehicle in a car yard. "This is usually inflated to allow the dealer/seller to negotiate down."
"If you have checked out sites like Trade Me, AA Car Fair and newspapers to find the fair value of the model you are looking at, you can decide the top price you're prepared to pay for it."
Buyers often ask for a discount for cash. The reality is car yards make more money from people who take the finance. Yet this is the group that is less likely to haggle.
Collins says staff also counsel customers into making sensible financial decisions over car purchases. One 22-year-old was hell-bent on buying a BMW, but downgraded his ambition after getting a bit of a talking to.
"We said, 'no, no, no, no, no'," says Collins. "In the end we got him into a [Nissan] Primera. We counselled him strongly that the Beemer might look great, but European cars are much more expensive to maintain and insure."
Car loans come laden with establishment fees, which can be as high as $700. Extending the mortgage often comes with a fee as well or may require the house to be revalued, says Wills. Even so, it might still be cheaper than taking out a finance company loan to buy the vehicle.
Car dealerships often attempt to sell payment protection insurance and expensive mechanical protection insurance to the buyer when it is not always appropriate. This adds to the overall loan cost.
The problem with payment protection insurance, says Wills, is that buyers are often so in love with a vehicle that they sign any papers put in front of them - including payment protection insurance.
Getting the best financial deal for a car isn't just about the loan or the purchase price. Dealers will try to pay too little for trade-ins. "If you do a trade-in, don't mention it until the price has been agreed on the car you're buying," says Collins. "Alternatively, you can sell it yourself privately and generally get a better price."
Brian Pethybridge, manager of the North Shore Budget Service, says clients are sometimes too fixated on the car to do a budget to ensure that they can afford the repayments. If they can't, they need to take corrective action to increase income or decrease expenses. "Ninety-nine per cent of people who come in here don't know if they can afford the car or not because they haven't budgeted."
That's not just limited to low income earners. Pethybridge sees struggling business owners who still want to buy the flash car.
He adds that when comparing motor vehicle loans don't just look at the interest rate and initial fees.
"You need to look at the total price package you are going to pay." That includes fees for late payments or to discharge the loan.
Roberts says thanks in part to tougher economic times and restructuring of the finance company industry, lenders have become more responsible. "In the case of lenders, most now want a deposit, and there is much more focus on affordability."
Car buying tips:
* If you can't afford an AA or similar check, go to the VTNZ for a pre-purchase check. That way you'll be made aware of any potential defects.
* Complain to the Motor Vehicle Disputes Tribunal if something goes wrong with a purchase through a car yard.
* Read all documentation. Make sure you are not waiving your rights under the Consumer Guarantees Act by signing a tender document or anything that says you are buying the vehicle for your business.
* Beware of what collateral you are putting up against any loan. Can you afford to lose your house for a car loan?
* Check whether finance is owing on a vehicle by visiting the Personal Property Securities Register: ppsr.govt.nz. You will need the vehicle's registration number, chassis number and VIN. Searches cost $3.
* Check the motor vehicle traders' register before buying from a dealer: motortraders.med.govt.nz/cms