Vehicles most dangerous debt

OPINION: When Christians Against Poverty were invited to tell the Government about the loans that really tip households into financial distress, its message was this: worry about car loans.

‘‘It is common, in Christians Against Poverty’s experience, for a client’s vehicle finance to be the most significant factor contributing to their financial hardship,’’ the debt advisory service said.

Now, this wasn’t in the context of just having a bit of a hard time, this was people who were skipping meals, couldn’t afford medical bills, and owed money for utilities.

This was families rationing food, power, water and healthcare, and the culprit was car debt.

Car debt was not the most common debt the desperate people coming to Christians Against Poverty for debt salvation had.

Of the households it had helped since it was founded 12 years ago, just 51 per cent had vehicle debt, compared to 69 per cent owing money to Work and

GOLDEN RULES

Work out your own car strategy Keep car loans to an absolute minimum

Focus on affordability, and reliability

Income, 78 per cent owing money on non-bank personal loans, and 74 per cent owing money on bank overdrafts, credit cards and personal loans.

But cars are expensive to buy, and expensive to run. If payments on a car loan are already hard enough, and you suddenly get a big mechanic’s bill, you’ve got a problem.

Car ownership borders on being a human right in this country, and the size and layout of our cities, and poor, timeconsuming and unpredictable public transport, makes it pretty hard for a household to live without at least one. That goes double for more affordable cityfringe and rural areas.

Most car loans do not lead to financial disaster in the short term but they do reduce people’s ability to get ahead. The more interest and fees you pay on nonhousing loans, the better for the lenders, and the worse for you.

Each of us then needs a car strategy, and not a thoughtless one.

I’m not going to tell you what yours should be. You have to work that out, but I can tell you the common errors I see in the thoughtless strategies people have. They are these:

■ Buying from a dealer and accepting dealer finance, insurance, extended warranties. Buying from a dealer isn’t insane, in itself, but for a secondhand car, it often means overpaying.

Australia has banned ‘‘flex commissions’’, where dealers get to effectively select the interest rate borrowers pay. New Zealand has not.

Arrange you own finance before you start car-shopping, if possible, focusing on getting the cheapest deal. Arrange your own insurance. Resist all efforts to upsell you in a dealership. Assuming that if a lender will lend to you, it must because you can afford it.

Affordability means so much more than whether you can make next week’s payment. Swallowing whole and uncritically the one car, one adult model of household car ownership, and not considering the alternatives like ride-sharing.

Being ashamed of a less-thanimpressive car. Better to have the fattest bank balance, and nicest home in your street than the best car on the biggest finance package.

Seeing a nice car as your right. I know people who do not even own a home who have bought a better car than I have ever owned, and done it with a loan.

Buying without knowing the fair price for a car of that age and make. This is easier to do, if your focus is on whether you can afford the weekly repayments. Buying without having a plan for repair bills. There’s nothing like having a realistic understanding of how much you need to set aside each week to run and maintain a car to focus the mind.

Not doing your research on what are the most reliable, costeffective models in their budget range.

Being rather anti-car, I tend to think in terms of the least acceptable car possible strategy being the best, you will have to make your decision on what strategy works for you.

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Finance for vehicles is tripping too many people up, one budgeting group says.