After buying a house, a car is the second most expensive purchase most people will make.
Whichever way you look at it, having a car is a necessity in most cases, especially here in South Africa where the public transport system is not reliable.
A car does not just allow you the freedom to get around, it helps you to get to and from work, which provides for your livelihood.
But cars carry a big price tag. There is a lot to consider when buying a car – whether it’s new or pre-owned. Most times people focus on the monthly instalment they think they can afford. For example, someone will say: “I can afford to buy a car which costs R5 000 per month.”
But what other important costs must one take into consideration?
The best way to buy a car is cash but not everyone can afford to do so. In most cases, you will have to finance the purchase through the bank. Although some banks may extend credit to you even if you don’t have a deposit, in the long-run this is costly.
Putting down a deposit is key and has two advantages: first it lowers your monthly instalments and second it can positively influence the interest rate the bank charges you.
Considered a grudge purchase by many, insurance does come in handy when needed the most. If you do not insure your car and then you are involved in an accident, it can potentially leave you in a financially uncomfortable state.
Depending on your risk profile, the cost of insurance on top of the R5 000 monthly instalment is about R900. This means R5 900 fixed monthly is going towards paying for a car, excluding petrol.
You are allowed to shop around for the most cost effective insurance, so don’t just take the first one offered to you at the dealership.
The price of fuel seems to be ever increasing. I find that this is one of the line items in a budget that can easily be understated.
When purchasing a car, also take into consideration how much fuel will cost you every month. You should also think about the regular increases in petrol and diesel prices. If you are upgrading your car, think about your overall budget and how a bigger tank will affect your finances.
The cost of owning a car can be high. You will have to take into consideration how much replacing the tyres will cost.
Will your budget allow you to replace tyres without a financial strain? That is why having an emergency fund is so important. It is for you to fund life’s surprises without resorting to using credit.
The infamous balloon payment! Just this past week alone, I heard a certain car being advertised on radio. And right at the end of the advertisement, they spoke about a “balloon” so quickly I almost missed it. What is a balloon payment? It is effectively a way for people to drive around in cars they cannot afford.
A balloon payment is a large payment at the end of the contract. For example, if you want to buy a car valued at R400 000 but found the monthly instalment too expensive, you can arrange a balloon structure. An amount, say R120 000, can be “taken off” in the short term, but you will have to pay that lump sum at the end of the contract, normally 60 months.
This lowers your monthly instalments but you will have to come up with the outstanding R120 000 later on.
What a pain!
As a rule of thumb, the price of your car, including other costs of ownership, should not be more than 30% of your monthly gross salary. On a salary of R20 000 for example, this means that the line item in your budget for transportation should not be more than R6 000.
When purchasing a car don’t overextend yourself by buying at the very top of your budget. Always leave room to save and invest your money.
This will come with more benefits; after all, a car is a depreciating asset.