Hello, I'm currently in 2 minds as to what I should do in regards to whether I should borrow money to purchase a new car or use some of my savings which I've put away for a house deposit? I'm hoping to start applying for home loans in a few months time but I'm in need of a new car asap. I'm only looking to purchase a car used for around $15k but don't really want to touch my deposit for a house. Will the banks look at me having a bigger asset in a $15k car better than not having a car at all even though I do owe money on the car? I currently have no debts whatsoever and no credit cards… any help would be great.
Top answer provided by:
Alison Greenwood
Hi Dan,
The ideal situation with regards to debt is to not have any, especially prior to retirement, however in the process of building up assets, debt is usually unavoidable.
The type of debt you take needs to be looked at carefully. A car is a depreciating asset in most cases unless it is a collectible. If you fully pay for a car, this is money that will no longer have the capacity to work for you. If you borrow for a car however you will have loan repayments to make. The things to look at in this situation where you need a new car and want a house are:
- Ensure you have an up to date budget, so that you can gage the capacity you have to make repayments on a car and house loan.
- Once you have an idea of what surplus you have, you can approach a number of financial institutions to discuss financing a car and a house and get some figures on both loan amounts. I would be asking for two separate repayment amounts, as a car loan is a much shorter loan, but also asking them to roll the two items in together so that you have a cheaper payment to look at if you find the amount of having two loans is stretching your budget too much. Remembering that spreading a loan over more years may be cheaper but will cost you more in the long run.
- Once you have these figures, go away and see how that fits with what you can afford in your budget. You will then know if you have the capacity to afford both within the timeframe you are hoping for.
- If you believe you can afford both, I would consider going through the process to get pre-approval for both the house and the car. This way you will know without a doubt that you can have both.
- If the loan is not approved, the finance provider can talk to you regarding what it is that the lender requires further and give you direction on how to achieve this.
At the end of the day I don’t believe it matters how this is achieved, whether through a separate loan or paying for upfront, as long as you can afford the repayments and you are able to get both the car and the property. A final point is to remember to shop around on repayments and ensure extra things added in to the repayments, such as insurances are being fully explained and agreed upon.
This article is of a general nature only and does not take into account your objectives, financial situation or needs. Please consult a qualified Financial Adviser, before making any decision on the basis of this article.
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