Car Yards Can Be Minefields
Sydney Morning Herald
Tuesday April 23, 1991
IT'S a good time to buy a car, new or used, with most dealers negotiating good prices in an effort to move stock during the prolonged slump in consumer spending.
While a car purchase is a significant financial decision that should never be made on impulse, people who are in a strong and secure financial position, and in need of a new car, may be well advised to take advantage of the present economic conditions.
Of course, it will be necessary before settling on a car to compare a wide range of prices from a number of different dealers. The same is true of arranging finance for the car.
As the accompanying table illustrates, the costs of car finance varies between different categories of lenders - banks, building societies, credit unions and finance companies - and between the competitors in each category.
As well as financial institutions, you also will find many car dealers offering you finance. Some even may give the impression they will not sell you the car unless you use the finance they are offering. While this may seem to be a convenient solution, enabling you to finalise the transaction on the same day with one set of negotiations, there is a single word of advice to offer about accepting finance from car dealers: don't.
Car salespeople haven't earned their reputations for nothing. They are acting as agents for finance companies, from whom they receive commissions and other financial benefits such as cheap loans, so they have a direct financial interest in getting you to arrange finance through them. Their commissions boost the cost of the finance to you, so, as solicitor Mr Gordon Renouf of the Redfern Legal Centre warns, the finance offered by the car yard is likely to be much more expensive than the finance you can arrange elsewhere. Even if you negotiate yourself with the same finance company the dealer is tied to, you will be able to get a cheaper deal.
The dealer also may try to sell you various insurance packages, which can boost the purchase price of the car enormously. Comprehensive insurance cover offered through car dealers - again acting as agents, this time for insurance companies - is up to 50 per cent dearer than if you bought the policy directly from the insurance company, says Mr Renouf.
Also, he says the dealer may offer you loan protection insurance (also called consumer credit insurance). This is supposed to cover your loan repayments should you become ill and be unable to work, for example. Once again Mr Renouf warns: "If you buy it through a dealer you are likely to be paying more than 300 per cent more than you could get it for if you did it yourself." A report from the Trade Practices Commission found that a car dealer would charge $834 for the same cover as you could get through a credit union for $234.
But probably the "most complete rip-off", according to Mr Renouf, is the so-called "extended warranty" or "mechanical-breakdown insurance" offered by many dealers. In normal circumstances you get a three-month warranty when purchasing a second-hand car through a dealer. It covers the cost of any repairs necessary during that period. But under this scam, your warranty is supposedly extended to a year or sometimes, the whole of the credit contract. The cost of this "service" is usually about $600 but Mr Renouf says it's"money down the drain".
This is because the fine print in the contracts offered makes them extraordinarily difficult to claim on, so much so that a Queen's Counsel who recently examined them said he could not imagine any circumstances in which it would be possible to claim. For example, you may be required to send in a monthly slip showing your car has been serviced by a particular mechanic or even using a particular product. If you don't comply with a rigorous schedule for submitting such slips you will be ineligible for cover.
With all these add-ons, Mr Renouf warns, "people can end up owing $15,000 on a $10,000 car even before they start paying the interest".
The cheapest source of finance to purchase a car is usually a bank, if you can get it, although building societies and credit unions also are lending at competitive rates, as the table shows.
The cost of a loan from these institutions will depend on the deal you can negotiate with them, which in turn depends on their assessment of your financial standing. Most will offer car finance as a personal unsecured loan, in which case all the costs of the loan must be built into the interest rate and no separate fees are charged.
As with any loan, you should read very carefully the terms and conditions of a car loan.
CAR FINANCE: WHAT YOU PAY Lender Rate % Security Max. term ANZ 18.5-20.6 Manager's discretion 7 years Commonwealth 17-19 No 7 years National 17.5-21.5 Manager's discretion 7 years State Bank 17.5 No 5 years Westpac 16.5-21.25 For over $10,000 5 years St George 18-19 No 5 years Credit unions 17.5-19 Varies 10 years AGC 18.5-23.5 Yes 5 years Esanda 18-25 No 5 years NRMA Finance 18.75-19.75 Generally no 5 years Custom Credit declined to supply information for this article.
© 1991 Sydney Morning Herald
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