How much should you spend on a used car?
Determining how much you should spend on a used car is a complicated process – To lend a helping hand, Drive spoke to a few experts.
Determining how much you should spend on a used car is a complicated process that usually involves many steps – each with its risks at the cost of the uninitiated’s finances.
From an extensive list of models currently available on the used-car market, different financial options, finding the right budget, additional car costs, and private versus dealership sellers, where do you even begin?
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To lend a helping hand in navigating the complexity of buying a second-hand vehicle, Drive spoke to a few professionals to get their thoughts on what consumers should look out for when it comes to looking for their next used car.
Disclaimer: This article does not constitute financial advice and serves as a general guide. Those looking for financial advice should consider contacting finance professionals.
What features do you want from a used car?
“It depends on who’s buying the car,” Michael McKenna, the Industry Policy Advisor of the Victorian Automotive Chamber of Commerce (VACC) told Drive.
“People have different likes and dislikes… if it’s a parent buying a [used] car for their kid they [may] want [a car] that has an ANCAP rating,” he added.
The 2023 Used Car Safety Ratings report, conducted by the Monash University Accident Research Centre (MUARC), ranked 518 models on a one to five-star safety rating based on various safety categories.
Of the 20 models that achieved a five-star “overall safety” rating – Japanese auto giants Toyota and Mazda were the most over-represented brands in this category, accounting for four and five models each respectively.
The MUARC data found that on average, a car built in 2021 decreases the risk of road users being killed or seriously injured by 33 per cent when compared to a vehicle manufactured in 2001.
According to April 2024 data from Autograb – an automotive insight company – five-star safety-rated used models such as the Toyota Camry, Toyota Corolla, Mazda CX-5 and Mazda 3 were among the most popular used cars sold by volume in April 2024.
“Toyota Corollas are bulletproof. Toyota has that reputation and brand respect from consumers [because] they’re such high-quality vehicles that they’re in high demand for consumers,” McKenna explained.
A spokesperson for Autograb told Drive while used vehicles with five-star safety ratings are ideal, "keep in mind safety standards do evolve every couple of years".
The Royal Automobile Association of South Australia recommended that used car buyers opt for popular models – depending on their needs – as “they often offer good value and have readily available and competitively priced spare parts".
According to Autograb's monthly Automotive Insight Report – which collects used car sales data from private sellers and dealerships – utes are consistently the most sought-after models frequently purchased by Australians.
"Undeniably the most popular models are [the] Ford Ranger and Toyota Hilux, however, the resale value would depend on the age, features and demand," the Autograb spokesperson told Drive.
Autograb said understanding the second-hand market relies on analysing the retained value of used cars – which reflects how much of the original new car price would hold up if it was sold today – rather than their resale cost.
Per Autograb, passenger vehicles – like a Toyota Corolla or Mazda 3 – generally retain 84.9 per cent of their value within a two- to four-year window, declining to 70.3 per cent in five to seven years.
A two- to four-year-old SUV – such as a Toyota RAV4 – maintains approximately 70.3 per cent of its original value and decreases to 62.8 per cent within a five- to seven-year bracket.
Light commercial vehicles such as utes – like the top-selling Ford Ranger and Toyota Hilux – aged two to four years old retain 82.1 per cent of their value, reducing to 70.8 per cent once they pass the five-year mark.
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Additionally, the Autograb spokesperson said the retention value of electric vehicles in the second-hand car market is dwarfed when compared to traditional petrol or diesel-powered models.
"The retained value of electric vehicles significantly underperforms ICE-powered vehicles, with the market very immature... used EVs form less than one per cent of the market," the Autograb spokesperson told Drive.
"We expect it to be several years before EVs begin to be a significant part of the used car market," they added.
Depending on where you live, specific mileage limits could also be an important feature when looking at the overall cost of a used car.
“Less than 100,000km is certainly important for some buyers, especially in city areas, but in the country where people tend to do more miles, this figure could be higher,” a spokesperson for the Australian Automobile Dealer Association (AADA) has previously told Drive.
The Autograb spokesperson agreed, adding: "Lower mileage vehicles... are likely to have less wear and tear and their servicing costs are likely to be less".
McKenna added buyers should keep an eye on the second-hand vehicle’s documents and check the vehicle's legal status.
“Service books are absolutely paramount if [the seller] doesn’t have them it’s a grey area. When you’re buying privately check the authenticity of the [service documents’ because [some private sellers] go on the web and duplicate service history,” McKenna told Drive.
“Always get a Personal Property Securities Register (PPSR) certificate on the car which will tell you if there’s any financial debt owed or if the car has been stolen [or is] a write-off,” he added.
Assess your income and expenses
Finding out how much you should spend on a used car starts with determining what your budget is.
AAMI Insurance stated on its website deducting essential expenses such as rent/mortgage, utility bills and groceries from your salary is the first step in calculating your financial parameters.
The insurance company said the financial savings percentage towards a car depends on what a buyer prefers – those who opt for a new or used luxury car “might decide to spend 35 per cent of [their] annual income".
While used car buyers who need a reliable mode of transportation from point A to B might need to spend “10-15 per cent of [their] yearly salary".
The RAA said a definitive and clear budget aids in “narrowing” down the search for the right second-hand car and can “also prevent [buyers] from being tempted by any add-ons dealers may offer, which are sometimes unnecessary.”
When speaking to Drive, McKenna made it clear buyers need to stick within their budget and avoid overspending on a car outside of their set price range.
“Make sure you buy the car you can afford and not the one you can’t, you’ve got a budget don’t pay too much,” McKenna said.
“Know your product [and] what you’re looking for and beware of the impulse".
Additional costs to consider
Beyond the buying price, those in the market for a second-hand car will need to consider additional ownership costs – such as transfer of ownership fees, registration, insurance and maintenance – in determining how much you should spend on a used car.
"Additional features usually mean the vehicle is priced higher, but misinformation or lack of, can lead to a misvalue... [buyers should] know the vehicle history and be on the lookout for anything not flagged up front by the seller," the Autograb spokesperson told Drive.
"Economic factors such as fluctuations in fuel prices, interest rates, changing consumer preferences, and supply factors can also affect the cost," they added.
According to a 2023 vehicle running costs survey conducted by insurance company Budget Direct which collected data from over 1000 Australian drivers, found that fuel was the "most-expensive ongoing car-related expense" – with over a third of respondents ranking it first.
Autograb's spokesperson told Drive a car brand's reputation and model reliability can impact the cost of a used car "if the cost to repair the frequent common issue is expensive".
However, a few experts said getting the used car checked by an independent mechanic is one way that can help buyers from purchasing a second-hand car with underlying problems.
Though a vehicle inspection comes at an additional cost to the buyer, the Royal Automotive Club of Queensland (RACQ) stated, "There is no substitute for an independent vehicle inspection to determine a vehicle's overall condition".
"We urge consumers to arrange an independent mechanical inspection," agreed McKenna.
Loan or outright purchase?
Depending on your personal finances Ben Waite, from Salt Financial Group told Drive: "If a second-hand car is what you can afford, then it's more financially responsible [to buy it outright] than paying more than you can afford".
Instead, Waite said buyers that may be "cash-poor (consumers with assets but no money for spending) [with] high wages and high tax" could consider novated leasing – a finance method used to purchase a new vehicle by deducting a set amount from a buyer's salary – as an alternative option for buying a used car.
"Most people still believe that you need to purchase a brand new vehicle under a novated lease. In reality, you can purchase a three-year-old vehicle [and] you [can] save yourself 40 to 50 per cent depreciation cost while still enjoying being able to lease your vehicle," he said.
While car loans can offer some financial aid, buyers need to take into account the extra costs associated with financing a used vehicle.
"It never really makes financial sense to borrow [money] for a depreciating asset. However, car loans can be a helpful financing option for used car buyers in certain financial circumstances," said Mr Waite.
"[Although] a car loan can allow you to purchase a car without draining your savings, it's essential to consider the terms of the loan, including the interest rate, loan term and monthly payments to ensure you can afford the ongoing costs associated with car ownership," he added.
"Car loans are suited to someone who will keep the vehicle [for] a long time and keep it once it's paid off".
Additionally, experts said used luxury car buyers should consider the depreciating value of these models in the second-hand market due to their relatively low supply and demand.
"The lower demand for second-hand luxury cars leads to an immediate decline in value. For example, luxury SUVs from 2016 will have only retained 45.1 per cent of their value, while non-luxury [SUVs] float above 55.7 per cent," an Autograb spokesperson told Drive.
However, Mr Waite said buying a luxury car second-hand can save buyers from the initial luxury tax – which places a 33 per cent tariff per dollar spent over a certain price threshold.
