I have been on the market for a new car for a year. I bought my car second-hand more than seven years. I bought it cash, with the help of my parents. (I used some of their pension money.) And until last year, the car had never given me any problems.
Buying a car can either make or break your finances. The decision to buy a car is not one made on a whim; it is normally planned or at least carefully considered. But our plans and what happens at the dealership can be two different things!
This brings me to what you should look out for when buying a car. Even if like me, it might not be your first car, I believe the principles still apply.
1. DO AN AFFORDABILITY TEST AND STICK TO YOUR PLAN
How do you know if you can afford a big purchase such as a car? Live three to six months like you own it already! What do I mean by this?
If you want to buy a car that will have running costs of R6 000 per month, every month before you even purchase it, put away that amount – or the difference if it is an upgrade – into a different account all together.
If you don’t have to dip into the funds at anytime during the month and you can still afford your day-to-day needs and wants, it means that you’ve passed the affordability test. You can go ahead and buy yourself a new car!
2. HAVE A DEPOSIT
The advantage of doing the affordability test is that you can use the funds you have been saving as a deposit for the new car.
Having a deposit is important because it lowers your overall debt as you don’t have to finance the entire transaction. Another advantage is that by putting down a deposit, you also lower your monthly repayments.
It’s always advisable and wise to have a deposit.
3. KNOW YOUR CREDIT SCORE
Your credit score is a history of your past behaviour with credit. It determines whether or not you qualify for financing and what kind of interest rate you get. The better your credit score is the more likely your interest rate will be lower. This is because the bank does not see you as being too risky to lend to.
You are allowed one credit report per year with each of the different credit bureaus, and before you make any purchases that require financing, it is always a good idea to check your credit score first.
It also helps you gauge whether the bank will extend you the financing you are looking for or not.
And it also allows you to work on improving it, should it not be in good standing.
4. NEGOTIATE YOUR INTEREST RATE AND DON’T BE AFRAID TO SHOP AROUND
If you have a handsome deposit and your credit score is good or excellent, there is no reason for you not try and negotiate a better interest rate for yourself.
Remember, the higher the interest rate, the more costly the overall purchase becomes. Don’t just go for financing with your bank, shop around with the other banks. Go for the one that offers you the lowest interest rate possible.
5. NEVER GO FOR BALLOON PAYMENT OPTION!
Patience is a virtue. If a statement was ever true when it comes to big-ticket items such as buying a new car, it would definitely be this one.
People get caught off guard – knowingly and unknowingly so – by the shinier options available. Take me for example. Last year when I was serious about buying my next car, I went to a dealership with numbers in my head. I was “certain” of the type of car and price range I was looking for. I almost bought a car that I had no intention nor business buying!
I went into the dealership and told the salesperson my specs and how much I was willing to spend (and not a cent more beyond that). But alas, he still showed me the better range with all the bells and whistles.
I thought to myself: “You can afford this, you deserve nice things like everyone else!” My only saving grace was thinking back to what I always preach: for any purchase – big or small – go home and sleep over it!
Buying a car can either make or break your finances. The decision to buy a car is not one made on a whim; it is normally planned or at least carefully considered
Even though with my professional knowledge, planning and taking affordability into consideration, I almost bought a car that I now know would have overextended my budget ... in other words a car I could not afford!
And that is what buying a car on a balloon payment means! A balloon payment means that a dealership works out a payment plan which lowers your monthly instalment but at the end of the contract period, say five, six or seven years, you have a lump sum outstanding.
The danger with this is that even though this arrangement might allow you to drive around in the car of your dreams, there is a heavy price to pay at the end of it. Many people forget about the balloon payment and in the last year of the contract, they realise that they don’t have the R100 000 that is due.
The alternative then is to take out a personal loan or buy a new more expensive car and roll over the balloon into the new shinier vehicle. Don’t do it, it’s a trap!