20 Common Car Buying Mistakes to Avoid
Navigate car buying confidently with our definitive guide. Avoid 20+ mistakes that all too often lead to high debt, stressful repayments and hardship.
Updated 18 March 2024
Summary:
Buying a car is exciting but also an easy way to get into heavy debt. Our guide explains how to avoid common mistakes that put your financial future in the front seat. Some of these mistakes include:
- Going straight to the dealership for finance is arguably the biggest and most expensive mistake. Shopping around and getting pre-approved finance is almost always cheaper.
- Being stuck with monthly repayments that disguise high interest rates is a proven way to be financially stretched for years. Too many borrowers look at the repayment amount, ignoring the total loan cost, which holds them back for years.
- Skipping a test drive is like buying shoes without trying them on - given the size of the investment, it's an essential step. We explain what to check during your test spin.
- Ignoring RightCar's rating, given that vehicle safety varies considerably, RightCar gives you all the information to make an informed choice and protects you and everyone in your car.
- Too few New Zealanders haggle and negotiate on a car's sales price - dealers and sellers expect it, especially since buyers have all the power.
- Not getting a pre-inspection is a bad idea. Dealers and sellers may have a report on hand, but why trust it? For around $200, you can get an independent second opinion.
Know This First - Why car finance can be a bigger problem than buying an unreliable car:
Finance is the backbone of most car purchases, but it's often where the biggest pitfalls lie. It's easy to get dazzled by flashy cars and smooth sales talk, but understanding what you're signing up for is critical given the costs you'll end up working to pay off:
- Dealership Trap: Walking into a dealership without a pre-approved loan can set you up for a finance trap. Dealerships very often mark up interest rates for profit. Shopping around first for a loan can save you a fortune.
- The Repayment Trap: Focusing solely on the monthly repayment amount (e.g. $400 or $600 per month) is a bad idea, and you're missing the big picture. High interest rates and long loan terms can leave you paying much more than the car's worth, chaining you to a debt that holds you down for years.
- Negative Equity Trap: It's not just about the monthly drain on your wallet. You're in negative equity when your loan balance exceeds its value, usually driven by aggressive depreciation. If you need to sell the car, you could still owe money on a car you no longer own and have to repay the lender while being short of money for a new car purchase.
- Repayments Stress: Constant worry over hefty car repayments can strain your peace of mind and your pocket. Too many people feel anxious about their due dates, which is why we want people to avoid car loans altogether or at least take out a small, low-interest loan. By doing so, you can avoid the minimal loan.
- Not Realising the Hidden Costs: It's not just the sticker price or the loan; cars are money vampires. There's insurance, maintenance, fuel, parking, cleaning, WOF, registration and repairs - and these costs keep rising.
Our view: Cars are expensive and can hold people back for years when the price is too high, and the loan is too big.
Our research team has received emails from everyday New Zealanders sinking financially from high-interest car loans. These loans affect their children, relationships, and social interactions due to the lack of spare money after essentials and a car payment. It's a huge problem and something we fight against.
Our guide highlights various car finance mistakes and other decision-making blunders that are simple to fall into but expensive to experience.
1. You went to the dealership to see what finance you could get.
Dealers are not known to be competitive; even a '0% interest' offer won't usually be 0% for long. You also risk immediately entering negative equity with a zero-deposit long-term loan.
The best approach is to determine what car loan size you can afford (and how much debt you can repay) and then compare car loan offers before even looking for a car.
Car lenders, brokers, banks, personal lenders, and credit unions all offer car loans, and interest rates vary significantly, which continues to surprise New Zealanders of all income levels. For these reasons, it's essential to know the interest rate before you look at any cars to avoid being sucked into the dealer's sales pitch.
2. You failed to test drive or skipped it altogether.
Car performance and handling vary between models, meaning what you've driven before may not be improved in a later model. The MoneyHub guide to test driving and guidance from Consumer Protection covers all the steps you need to follow to ensure you get a car you're 100% happy with. Don't rush this part of the buying process; relying on your instincts will get you the best result.
3. You didn't look up the car on RightCar.govt.nz
Crash ratings vary significantly, and the difference between a five-star and a two-star rating is significant. The government constantly advertises its RightCar site to help anyone buying a car avoid unsafe vehicles.
The importance of a safe car cannot be underestimated (despite not being a priority for many New Zealanders). Your car doesn't need to be written off for the star rating to be relevant - your risk of serious injury from a moderate collision increases significantly the lower the star rating.
We suggest verifying a car's safety rating, given it's not always advertised alongside the car. The RightCar website scores a car with overall safety, driver safety, road user safety, fuel economy, carbon emissions and air pollution. These star ratings are increasingly important for resale.
4. Your car uses a lot more petrol than you expected (and budgeted for)
Many car buyers overlook the fuel consumption and get caught up with unexpected high fuel costs that can't be avoided and impact their ongoing expenses.
Choosing a fuel-efficient car can save you a substantial amount in the long run; we suggest using RightCar's fuel consumption and efficiency rating of various models to avoid buying a car that guzzles fuel and the ongoing financial burden that always goes with it.
Car Loan Expert founder Christopher Walsh shares his views on why petrol consumption is so important:
"I drive a fuel-efficient car, and a recent experience reminded me why I'll continue doing so. I was 'upgraded' recently when I rented a car in Queenstown, and anything beyond a run-around can be super thirsty. While I reserved a small sedan (think Toyota Corolla), I got given a gas-guzzling 4WD I didn't need or want. I then had the privilege of paying $220 to refill it before dropping it off. I think the total mileage was around 700 km, which suggests around 10 litres per 100 km, which adds up when petrol hovers around $3/litre".
5. You thought the sticker price was the starting point for negotiating.
A common mistake many car buyers make is assuming the sticker price is the lowest price the seller will accept. In reality, the sticker price is often just a starting point for negotiations, and too many New Zealanders fail to negotiate aggressively.
Before you step into a dealership, you'll need to research the market value of the car(s) you're interested in. Websites like Trade Me and AutoTrader offer valuable insights into what others pay for similar models. Once you know the price ranges, you can confidently negotiate a better deal. Dealerships expect buyers to negotiate and often set sticker prices higher to accommodate this - don't shy away from pushing to get a deal, and keep a neutral attitude and focus on the car's value and your budget.
Dealerships may add annoying fees such as processing, documentation, and delivery - we suggest asking for those to be waived as part of the negotiation process.
6. You fell for the 'today only' offers, 'specials' and 'must-have' add-ons.
Car salespeople don't want someone to leave the lot – the risk of them not returning is too high. Furthermore, the profits generated from selling a car are largely driven by the add-ons, not the actual car. It's similar to buying electronics, where a retailer will push extended warranties because it's far more profitable than just selling the item.
You don't need to buy the car when you visit the dealership, and you should ignore any pressure – our guide to navigating dealerships has more details. Signing up for a car loan, MBI, GAP insurance and/or a service agreement is costly and often full of fat profits for the dealer.
You don't need to rush – the more time you research and browse, the better the deal because you will avoid paying for things you don't need.
7. You didn't understand the true value of your current car.
Most New Zealanders either have no idea what their car is worth (despite useful tools such as Trade Me's Value My Car and BestCar giving accurate ranges) or think it's worth much more than it is.
The best approach to trading in a car is to get a range of quotes that will give you an accurate value – we suggest using this tool from Trade Me and other options in this car valuations guide. Then, when it's time to trade in, you have a firm number that you don't need to be talked down on because you've done the pre-work.
8. You became emotionally involved with buying the car
Getting emotionally attached to a car during the buying process is a common mistake. Car salespeople are experts in creating an emotional connection between you and the car. They know that once you've formed an attachment, you're more likely to overlook practical concerns and potentially overspend.
Salespeople might encourage you to envision yourself in the car, highlight features that elicit emotional responses, or create a sense of urgency -don't fall for it; keep a rational perspective at all times.
We suggest test-driving multiple cars to help prevent attachment to a single vehicle and get a broader perspective to help you make a well-rounded buying decision.
9. A monthly repayment amount was a deciding factor in your car purchase.
Deciding on a car based solely on the affordability of monthly repayments, such as $500 a month, can be misleading and costly. This figure doesn't consider the total length of the loan or the cumulative cost, including interest charges, loan fees, and unnecessary add-ons.
A $500 monthly payment stretched over a longer term, like five or seven years, significantly increases the total amount you'll pay compared to a shorter loan term. This is why it's essential to always ignore the monthly payment and instead understand the total cost of the loan over its lifetime.
Focusing solely on the monthly payment can lead to overpaying and ongoing financial strain for many New Zealanders currently repaying their car loan. What matters is the overall loan cost (and whether or not you can afford it), not the monthly payments.
10. You bought more after you thought you'd already bought the car.
This happens usually in new vehicle purchases, but not always. Once you've agreed to buy the car, you may meet a 'delivery coordinator' tasked with upselling items for maximum profits. This may include rust-proofing, carpet protectors, alarms, paint protection and fabric protection, among other items.
Our View: Accessories do not increase the value of a car, so when it comes to selling it later on, the money you spend upfront is likely lost.
11. You didn't have a mechanic inspect the car because the dealer did this for you.
Unless you're a mechanic, you won't know much about the car - car inspections cost about $200 from trusted mechanics and the AA and are invaluable. Too many New Zealanders regret a car that leaks oil, doesn't handle right, or has shortcomings that can be avoided altogether by passing on the car.
Relying solely on the dealer's inspection can be risky, and we continue to be amazed at how many buyers accept it as the only opinion. An independent inspection is crucial, as it offers an unbiased assessment of the car's condition. It's not just about the obvious issues like oil leaks or handling problems; there are other potential concerns that only a detailed check can uncover, such as electrical system checks, hidden frame damage, flood damage, an accident and repair history and future maintenance cost estimates.
Investing about $200 in a pre-purchase inspection with a trusted mechanic or the AA avoids the risks of not knowing the car's true condition.
12. You got ripped off by the car finance.
It's a well-known fact that car dealerships can make substantial profits from selling car loans, often more so than from selling cars themselves. However, the terms might not always be in the buyer's best interest. They may include high interest rates, hidden fees, and unfavourable terms that significantly inflate the total cost of the car over time. This issue is the central theme of Car Loan Expert and something we fight against daily.
Car Loan Expert founder Christopher Walsh shares a reader's experience which flagged to them a dubious used car yard in Hamilton:
"I received an email from a reader who had followed our dealership guidance and arranged their finance in advance. They then went to a used car yard to see a car listed on Trade Me. After asking about it, the dealer promptly asked whether the buyer had finance. When he said yes, the dealer said the car wasn't for sale. They then asked about other cars on the lot; the answer was "no cars are for sale". This suggests the car yard packages cars with finance, which isn't in the consumer's interests, and anyone doing this is best avoided".
13. You weren't clear about GAP, MBI, theft protection, and PPI insurance.
Understanding insurance options like GAP (Guaranteed Asset Protection), MBI (Mechanical Breakdown Insurance), theft protection, and PPI (Payment Protection Insurance) is crucial. GAP insurance is available from various sources, including your insurer.
This insurance covers the difference between your car's actual cash value and the amount you owe on your loan, which is particularly important if your car is written off or stolen. You owe more than the vehicle's depreciated value.
These insurances can be helpful, but they come at a cost and are often loaded with dealer or broker commissions. We suggest comparing quotes among insurers who offer GAP and MBI policies, as the savings can be significant.
14. You bought a new car when a pre-owned would do.
Opting for a brand-new car when a pre-owned one would suffice can be a costly mistake. New cars depreciate rapidly in the first few years, meaning you might be paying a premium for a car that quickly loses its value. If you've financed it, you're likely to soon go into negative equity. Used cars are almost certainly able to meet your needs as well as a new car but offering much better value for money.
15. You overlooked the total cost of ownership.
You might focus only on the purchase price and ignore other expenses like insurance, maintenance, and depreciation. This oversight can lead to unexpected financial burdens over time. Remember, buying the cheapest car isn't always the cheapest to own. This guide explains how to cut down the cost of owning a car.
16. You didn't consider the car's resale value.
Some cars lose value much faster than others. If you don't consider your vehicle's potential resale value, you might have a significant financial loss when it's time to sell or trade in. Choosing a car with strong resale value is a smart financial move.
17. You didn't understand the car loan's interest rate.
Many car buyers only consider the monthly payments, overlooking the interest rate they're being charged. The lower the interest rate, the cheaper the rate. Don't just accept the first financing offer; shop around for the best interest rate to save money in the long run.
18. You didn't check your credit history beforehand.
Your credit history still plays a vital role in your car financing journey. Lenders evaluate your credit history alongside your existing debts, income, and expenses to assess your reliability as a borrower. Not being aware of your credit history before you start shopping for a car can put you at a disadvantage.
Lenders usually determine interest rates based on your credit history. If you have a history of missed payments or defaults, you will usually be offered higher interest rates (or declined outright).
19. You bought a car from a private seller without checking for outstanding debt
Buying a car from a private seller without verifying if money is owed can be a major oversight. New Zealand law is clear - if you buy a car with unpaid debt, you could become responsible for that debt. This situation is more common than many people realise, and it can turn your new car into a costly burden.
Before buying any car privately, you need to check if there's debt owed through services like the Personal Property Securities Register (PPSR) or CarJam. Only by doing so can you ensure that the vehicle is debt-free and safe to buy. Neglecting this step could mean inheriting someone else's financial problems along with the car and you can quickly end up with no car if it's repossessed.
20. Ignoring the technology and electronics of the vehicle
Modern cars are increasingly built with complex technology and electronics that significantly impact the driving experience and maintenance costs. Overlooking these aspects can lead to unexpected expenses and challenges.
Infotainment systems, driver-assist technologies, connectivity options, and electronic components usually require regular updates or maintenance and can be expensive to fix or replace. If you don't understand how something works or don't think you'll need it, ask about it and make an informed decision.
Frequently Asked Questions
What are the first steps to take before beginning the car-buying process?
Start by assessing your needs, budget, and credit history. Research different car models read reviews, and familiarise yourself with market prices. If possible, pre-arrange your financing and know the type of car that suits your needs and budget.
How do I ensure I get a fair car loan deal?
Compare car loan offers from various lenders, including banks, credit unions, and online lenders. Understand the interest rates, loan terms, and any additional fees. Compare as widely as possible to maximise the chance of getting the best possible deal.
Is it better to buy a new or used car?
This depends on your budget and preferences. New cars come with the latest features and full manufacturer warranties but depreciate faster. Used cars are more affordable, and the depreciation is slower, but they may have higher maintenance costs.
How important is a test drive, and what should I look for during one?
A test drive is crucial. It helps you gauge the car's comfort, handling, and performance. Look for visibility, braking, steering, ergonomic comfort, noise level, and the overall driving experience. Test various scenarios like highway driving, hill climbing, and parking - this guide explains more and has a helpful checklist.
What should I know about the car's technology before buying?
Understand the functionality and maintenance of the car's technology, including the infotainment system, navigation, driver-assistance features, and connectivity options. Consider how these features might affect long-term maintenance and repair costs.
How can I avoid negative equity in my car loan?
Avoid long-term loans and zero deposits, as they can quickly lead to owing more than the car's worth. Make a substantial deposit, choose a loan with a short term, and select a car that holds its value well.