Buying a new car on credit might feel like a fresh start - new safety features, fewer repairs, that great new‑car smell. But experts warn it can also be a ticking financial time bomb, especially if you hit a bump in the road later.

The downside of depreciation

The moment you drive a new car off the forecourt, its value drops, and fast. Consumer NZ says new vehicles can lose up to 30% of their value in the first year alone. You won’t feel that loss immediately, but you will when it’s time to sell.

“That makes borrowing to buy them really problematic,” says Sorted.org.nz personal finance lead Tom Hartmann.

Borrowing magnifies the risk for both you and the lender. Lenders protect themselves by charging higher interest rates.

“And they might tack on fees or insurance,” Hartmann says.

If you fall behind on payments, some lenders can even get “heavy‑handed” and immobilise your car remotely – using an immobiliser you’ll likely pay for.

The risk for you

While lenders can price in their risk, Hartmann says borrowers have far fewer protections.

A small change in your circumstances - fewer shifts at work, unexpected bills - can leave you stuck with a rapidly depreciating asset and a loan. Bear in mind, some finance companies can charge interest rates up to nearly 30%.

And if the car is written off or stolen? The loan doesn’t disappear with it.

“You can end up with the debt costing you more than what the car is worth, and that’s not a great financial situation to be in,” Hartmann says. “This is when people get themselves into trouble.”

Don’t be fooled by the weekly payment

Low weekly payments can be seductive. But always calculate the total cost of the loan, including interest, and any fees and insurances. Remember that shorter loan terms mean higher weekly payments but far less interest overall. And school up on what will happen if you miss a payment.

Ensure you’re comfortable you can afford the full long-term cost of buying the vehicle before going ahead.

Interest.co.nz sums it up like this: most people only look at finance after falling in love with a car, making it hard to step back and compare deals properly “when the 'deal is on the table'.”

If you’re worried, act early

The best time to get help is before you miss a payment, when things are just starting to get tricky - or you could even get advice before you sign up to the loan.

Hartmann recommends using the free, confidential MoneyTalks service. You can speak to a money mentor on 0800 345 123, email them, or text 4029. You can stay anonymous if you prefer.

It also pays to talk to your lender early if you’re starting to struggle.

“Many lenders will help by adjusting a loan so you can get things back on track. And budget advisers are available to help negotiate on your behalf. But for most of us, if we are left to our own devices, things will rapidly go from bad to worse,” Hartmann says.

Written by: Sonia Speedy