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Every young person’s dream of owning a brand-new car can turn into a long-term financial nightmare by creating a financial burden that locks them out of the property market and home ownership.
Blogger: Daniel McQuillan, executive director, Investwise
The fact is that many young people take out large personal loans to buy a new car and as a result, the repayments plus this debt, can then make it very hard for them to buy their first home or even an investment property.
New cars are often purchased on emotion but the reality is that they very quickly lose their value while property increases in value over the long term.
Over 10 years, most properties tend to double in value whereas a new car is virtually worthless after 10 years. In addition, there is no tax relief for the average person who buys a new car, while there are very significant tax benefits when buying a property through negative gearing and depreciation. That is why it is financially insane for young people to take out a large personal loan to buy a new car.
For astute young people, it is better to either use public transport for an extra number of years or buy a second-hand car and put the surplus money into buying an investment property rather than a new car.
Once they have created real personal wealth through property investment, they can begin to treat themselves to luxuries such as new car.
This message about buying new cars is very pertinent in Western Australia, which has one of the highest rates of motor vehicle ownership in the world.
Last year ABS figures show that WA recorded the fastest growth in motor vehicle registrations in Australia, jumping by 4.6 per cent to 2,142,309 vehicles.
It is also significant that during the past five years, Western Australia along with the Northern Territory recorded the largest increase (14.14 per cent each) in the proportion of Passenger vehicles.
This message about overspending on new cars does not just apply to young people but also more mature people. The obsession with cars in Western Australia is also resulting in too many average families overspending on cars rather than investing in property.
Unfortunately, a large number of average homes in mortgage belt suburbs in Western Australia now have expensive cars parked outside, which is a waste of money for families.
When you consider that the interest rates for buying a new car are much higher than for owning a property, then it even makes even less financial sense for most families with a large mortgage to own an expensive new car. When interest rates start to rising, many families with expensive cars are then crippled with paying off both their car and home loans.