Barefoot Investor: Will car loan help me get a credit rating?
A TEENAGER saving for her first home wants to buy a car to get a credit rating, but is she going about it the right way? Here’s what Barefoot Investor Scott Pape thinks.
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FIONA’S daughter is saving for her first property and wants to buy a $20,000 car so she can get a credit rating, but is she going about it the right way.
TAKING THE WHEEL
FIONA ASKS: My 18-year-old daughter lives at home, pays no board, works full time, and is saving for her first property.
She also wants to buy a new car ($20,000) so she can get a credit rating, which will make it easier to get a home loan.
Should she keep driving the old car and put all her money towards the house deposit, or get the car loan and take a bit longer to get into the property game?
BAREFOOT REPLIES: Congratulations on raising such an ambitious daughter!
Now it’s up to you to teach her some common sense.
Spending $20,000 on a brand-new car will not help her buy a home in any way, shape or form.
Instead, she’ll just end up forking out roughly $30,000 for a car that will only be worth $10,000 in five years’ time. The idea that you need to take out a loan so a bank will lend you more money is absurd.
Just like Sam Dastyari, the credit reporting agencies have done their darnedest to convince everyone they’re more important than they really are.
Now it is true that if you’ve got something bad on your credit file it can be a red flag to lenders. But for a cleanskin, like your daughter, it’s really not a big deal.
What is a big deal for lenders is: 1) a stable income that can comfortably meet your proposed repayments;
2) a verified savings history; and 3) a meaty deposit (I recommend 20 per cent).
If your daughter can tick those three boxes, she’ll get her loan.
MANDY ASKS: I’m a 26-year-old woman working full time in a job I hate. Quite frankly, I am sick of working for the man!
Now, I have never had my own business before and I am a little apprehensive, but I love fitness and I also love F45 (a new high-intensity interval training fitness franchise).
It is rapidly growing on a global scale, with 750 studios around the world already.
The cost to open a franchise is $150,000, plus $1700 a month in fees (plus rent, wages, taxes, etc).
I do not have the capital, so I would also need to apply for a business loan. Do you think this is a good idea?
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BAREFOOT REPLIES: A mate of mine does F45 — short for ‘Functional 45-minute’ training — and fair dinkum he never shuts up about it.
But let’s get one thing straight: if you buy a franchise you’ll still be working for the man — but in this case it’ll be the ex-finance dude who dreamt up the F45 franchise model.
I imagine he’s currently lifting gold-plated barbells from all the money he’s making … and good on him too! All I’m saying is that in this equation he’s the entrepreneur — and you’re the worker.
So, would I buy an F45 franchise? No, I wouldn’t.
And it’s not because I could risk having a cardiac arrest if I actually did F45 — it’s because I’ve put the franchise through its paces, just like I would with any investment.
So let’s you and I do a money workout.
First, let’s look at the sector. Australia’s gym market is one of the most competitive and saturated in the world, according to IbisWorld. (Why are we so fat, then? Is it the chicken or the egg? Or maybe it’s the chicken and egg sandwiches.) Simply put, there are a lot of businesses fighting it out for our fitness dollars.
Second, one of the key selling propositions of the F45 franchise is that there’s not a lot to it — two trainers, four walls, and a bit of equipment.
Easy to start … and easy for potential competitors to start too. And what about when ‘F6’ comes out? (Seriously, I could totally blitz six minutes of training.)
Third, while F45 is going bananas right now, the business is just five years old.
What will it look like 10 years from now? Fitness is a faddish industry (hello Zumba, Tae Bo, and pole dancing fitness). Heck, F45 is itself a gentler version of CrossFit, which is now reportedly starting to run out of puff. So, here are a couple of questions you need to ask yourself:
How quickly could you earn back your upfront costs (a $150,000 loan plus $1700 a month)?
Even better, could you avoid borrowing (which always ramps up the risk and makes life more complicated) and instead — as we Barefooters call it — ‘swing on the trapeze’.
That is, keep your day job, start a morning and weekend fitness boot camp, and make a go of it for the next 12 months to test it out.
If it’s a winner, quit your job and go for it!
Tread your own path!
TAKING THE WHEEL
FIONA ASKS: My 18-year-old daughter lives at home, pays no board, works full time, and is saving for her first property.
She also wants to buy a new car ($20,000) so she can get a credit rating, which will make it easier to get a home loan.
Should she keep driving the old car and put all her money towards the house deposit, or get the car loan and take a bit longer to get into the property game?
BAREFOOT REPLIES: Congratulations on raising such an ambitious daughter!
Now it’s up to you to teach her some common sense.
Spending $20,000 on a brand-new car will not help her buy a home in any way, shape or form.
Instead, she’ll just end up forking out roughly $30,000 for a car that will only be worth $10,000 in five years’ time. The idea that you need to take out a loan so a bank will lend you more money is absurd.
Just like Sam Dastyari, the credit reporting agencies have done their darnedest to convince everyone they’re more important than they really are.
Now it is true that if you’ve got something bad on your credit file it can be a red flag to lenders. But for a cleanskin, like your daughter, it’s really not a big deal.
What is a big deal for lenders is: 1) a stable income that can comfortably meet your proposed repayments;
2) a verified savings history; and 3) a meaty deposit (I recommend 20 per cent).
If your daughter can tick those three boxes, she’ll get her loan.
NOT KIDDING AROUND
LINDA WRITES: I love your Q&A column, but it’s very shortsighted to say “no one ever regrets the kids they have”. I know many women who had children because they felt they HAD to.
Having a child is one of the biggest gambles a woman can make, so please don’t reduce it to nothing just because, as a man, you don’t have to risk your health, body, future earnings and career to do so.
I get that you are a family man, but please don’t go around spouting nonsense like this.
You’re smarter than that.
BAREFOOT REPLIES: The women who work for me (all mums) went crazy over your question — some for, some against.
I certainly wasn’t suggesting that having children is “nothing”. (My wife is currently in her third trimester, coming into a sweaty summer, and our two young boys have worked out there’s an intruder about to enter the house, so our life is anything but The Brady Bunch.)
All I said was “no one ever regrets the kids they have … only the ones they don’t”. And I think the vast majority of parents would agree with that … well, eventually.
The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.
Originally published as Barefoot Investor: Will car loan help me get a credit rating?