04 Mar Think twice about buying a car on your house.

When you’re looking to purchase a new car or upgrade the old one, it can be tempting to top up your home loan to finance it. Car finance interest rates are usually higher than home loan interest rates, so you’d think it would make perfect sense. However, you may not realise that it’s much better to pay off your car as quickly as possible, especially when interest rates continue to rise. Here we explain three reasons why.

Reason 1 – You’ll pay less interest.

Yes, really! A mortgage can last for decades with an average loan term of 25 years, whereas a car loan is usually 3 years or less. Even if the interest you’re paying is a little higher, the shorter the loan term, the less interest you are likely to pay overall.

Here’s a comparison:

If you add a $20,000 car loan to your mortgage with an interest rate of 6% on a 25-year loan term, the total amount you will have paid overall is $38,700. That’s $18,700 in interest alone, almost the cost of another car!

Alternatively, if you get $20,000 in car finance with an interest rate of 12% on a 3-year loan term, the total amount you will have paid overall is $23,904. As you can clearly see, you’re already winning.

Note: The above comparison is for indicative purposes only. Interest rates are subject to change and are only current at the time of writing this article. Oxford Finance fees, terms, conditions and normal lending criteria applies.

Reason 2 – Pay off one car at a time.

Cars rarely grow in value and are often deemed as a ‘deprecating asset’. I’m sure you’ve heard the saying that a new car loses its value the minute you dive it out of the car yard. Aside from loss in value due to general wear and tear, new car models with improved features are introduced by car makers every three to six years.

In a few years’ time you could find yourself in a position where you’ve sold your car and are still paying it off through on your mortgage. Or worse yet, you’ve upgraded your car and are paying off two cars at once!

Reason 3 – Protect the equity in your home.

Everyone knows that if you can, it’s best to pay off debt as fast as possible. This might sound quite difficult right now when you think about inflation and the increased cost of living in New Zealand. However, with the money you save from getting car finance, you may be in a position to put that money towards your mortgage. Remember, if you keep adding to your mortgage, you’ll never get it paid off.

Reprinted from the article published on Oxford Finance website October 19, 2022