Get Sorted: Cars and cash, that combustible mix

The boss' sweet ride - a 1972 240Z - a rare example of a car that has actually gone up in value.

Boss man is a petrol head. My manager's still got a couple of engines on stands in the garage - projects from the days before the kids arrived. And he's been wheeling out his 1972 240Z at work events - perfect in Sorted orange - for fun, too.

That Z is a sweet ride, but not only because of all those horses under the bonnet: it's a rare example of a car that has actually gone up in value. Yes, they're a few around, but not many, really. At last count his originally $12k set of wheels is now worth north of $30k.

Most tanks we drive deflate in value tremendously. And don't get me started on how we finance our vehicles. There has got to be a better way!

Picture yourself driving a bright, shiny new ute off the dealership lot, the sales and finance teams waving at you in the rear view... with thousands of dollars evaporating as you turn the corner! No one would pay you anywhere near the same amount of money that you just dropped for that new car smell.

Let's get savvy about our financing. If you think about it, here are the main puzzle pieces we need to get into place when we're borrowing money for a car:

How much we pay = loan amount + interest and fees + repayment time
If any of that stuff on the right side of the equation goes up - the amount we borrow, the add-ons, or how long we take to pay it back - then so do our overall costs. The idea is to keep all three as low as humanly possible.

The first two make sense: if we borrow more, we have more to pay back; if interest rates are higher or set-up fees rise, once again we have to pay more back.

But time - that third element - often trips us up. This is because when we pay off our car over a longer period, our costs seem like they go down. We have less to pay back every month, and those lower bills feel much more manageable.

$20,000 @ 15% over 3 years = $726 a month
$20,000 @ 15% over 5 years = $429 a month

The reality is, while we may have a smaller nut to crack each month, by increasing the term of our loan we've also increased the number of repayments we'll have to fork over. We may as well roll a tyre over our foot in the driveway.

$20,000 @ 15% over 3 years = $26,145 total cost
$20,000 @ 15% over 5 years = $29,904 total cost

And this happens to rich and poor alike. (I'm thinking of all the equity-laden folks ponying up for $50,000 Euro-wheels.) Compound interest does not discriminate when it comes to debt; it works against us all. Even by extending a mortgage at 4.5% to buy a car, the longer we take to repay, the more we're going to pay."

$50,000 @ 4.5% over 3 years = $53,544 total cost
$50,000 @ 4.5% over 5 years = $55,929 total cost

Here's where the total cost of borrowing is so important to see. Sorted's debt calculator shows how increasing the time period of a loan, although less painful in the short term, in turn increases how much of our hard-earned cash we part with in the long run.

And that $20,000 car after five years will only be worth close to $7,800 anyway. That $50,000 one will plunge in value even more, and be worth around $17,000.

All of which makes that classic Datsun look better and better, every time the boss breaks it out.

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and calculators fromSorted -brought to you by the Commission for Financial Capability - at sorted.org.nz.