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Are you buying more than you can afford?

According to the AA, up to 70 per cent of all vehicles sold in New Zealand are bought with some kind of financing attached. Currently car/personal loan rates vary between 9.99 and 19.50 per cent interest through a bank or credit union. But it's easy to end up paying up to 27 per cent through car yard finance.

At the same time, cars can depreciate up to 20% per year. So is a good idea to pay for a high interest rate over the next 2 years to end up with a car that's worth a lot less?

In her article Don't be taken for an expensive ride, Diana Clements points out with a quick example how finance and depreciation combined means you can end up worse of.

"The first thing to get your head around is that interest payments mean you'll pay far more than the ticket price for the vehicle. You'll almost always have motor vehicle, and loan repayment insurance, and establishment and other fees added on to the loan, so you've often clocked up another couple of grand before you make the first payment.

There is a rule of thumb, says Henry Lynch, chief executive of Co-op Money NZ, that you should never buy a car that you can't pay off within 36 or 48 months.

At the same time your wheels will be depreciating at up to 20 per cent a year, points out Lynch. So in theory a $10,000 vehicle might be worth just $5000 or $6000 in a few years.

Yet a $10,000 loan at 12.99 per cent with $2000 of loan fees and insurance added on top will end up costing you over $14,500 over three years, or $15,400 over four years".

This is not a pretty picture. Debt can be a good thing if it helps you grow your wealth. But are we biting off more than we can chew by using a personal or car loan?

There's always a better car out there so it is easy to be tempted to upgrade. However, if you decided you need a new car and you do need finance, always shop around. Best place to start is your mortgage. If you have equity in your house you could use it to finance your new car. This way you will only be paying 5% interest. If you want to find out more about this option give us a call on 0800 500 510.