Buying a car is expensive, but you don't have to give up your dreams to move from point A to point B. Picture: iStock
Car finance is undoubtedly one of the major mistakes people make when it comes to their finances. Spending too much on a car has a material impact on your ability to meet other important financial needs. Too often, in anticipating the excitement of driving the car of our dreams, we forget to do a proper budget to see what we can realistically afford.
In our Money Makeover competition, two of our contestants had a focus on cars, but for different reasons.
Samke (26) wants to buy her first car and make sure she can afford it.
Widow Amanda decided to downgrade so she could find some extra cash in her budget each month.
How to make sure your finances are ready for a new car
In order to get to work, Samke currently spends about R2 000 a month on transport. Given this expense and the convenience factor, it makes sense for her to buy a car. However, her Absa adviser, Steven Williamson, wants her to make sure her budget is ready for car ownership.
Pay off other debt first: The first goal was to pay off all short-term debt before committing to car repayments. Sticking to a budget and creating a debt repayment plan, Samke will be debt-free at the end of this month.
Have an emergency fund: Williamson also recommended that, before committing to a car, Samke should build up an emergency fund. She has been paying R2 000 into her emergency fund each month.
Save for a deposit: Once her debts are fully paid off, Samke will have an additional R1 000 to save. This amount, plus any bonuses or additional savings, will go towards building a deposit for her car. If you are preparing your budget for car ownership, start saving the equivalent in car instalments towards your deposit.
Understand the full costs: Samke’s budget would provide for a total car ownership cost of R5 000 per month. The mistake many people make is to go out and purchase a car with a R5 000 monthly repayment, without calculating the other car ownership costs such as fuel and insurance.
Based on fuel costs of R800 (Samke will drive 200km a week) and insurance of about R700 per month, she can afford a car for R3 500 per month.
Time and interest: Based on current vehicle finance funding, Samke can expect to pay an interest rate of 13.25% for her car finance. With a good credit record she could try to negotiate a lower rate. What is more important, however, is the time period over which she pays off the car. The sooner she pays it off, the more interest she saves. She should only consider a car she can afford to pay off over 48 or 54 months and never take a residual or balloon payment.
City Press asked Auto Kustom (autokustom.co.za), an online dealership which sources cars nationally, to calculate what car Samke could afford. This included the R15 000 deposit, so they considered vehicles under R155 000 in the market.
Samke’s choice was the Kia Picanto, but Auto Kustom suggested the Suzuki Celerio. It costs R15 000 less, has a bigger boot and has lower CO2 emissions, fuel consumption and insurance. With the R15 000 deposit the purchase price is R124 900; she could pay over 48 months with instalments of R3 450. The total cost would be R165 600.
Or, she could give herself a bit of room to breathe by financing over 54 months, should interest rates increase or petrol costs rise. Her instalment would be R3 165 and total cost R170 000. She could pay in extra each month to accelerate the repayment.
If Samke chose the Kia, it would have to be over 54 months. Instalment: R3 548, which is just over her budget and would not give her any leeway.
Total cost: R191 592.
Downgrading isn’t necessarily a sacrifice
‘I WOULD Never have thought of downgrading my car but, once the penny dropped, it was the most logical thing to do. I encourage anyone in a similar position to consider doing the same, because it is a step towards freedom, and it is not forever,” says Amanda, who adds that it was exciting shopping around for new wheels.
What she discovered was that it was the combined saving on the instalment, insurance and petrol that put R1 000 a month back into her pocket – money she can use to start an education fund for her children – and she has a new car.
“I am very happy with my new car and it has features that the older car did not have. When I showed my car to a colleague, she asked, ‘What are you going to do for holidays?’ Well, my brother has just sponsored us a holiday and I managed to drive us to the airport with five pieces of luggage in the boot. You make adjustments and not just by downgrading your car, but also by taking less luggage!”
The money-saving sums
Amanda was paying:
- R2 678 per month in instalments
- R752 in insurance
- R1 200 in petrol
She was able to sell her seven-seater SUV for R135 000 which, after settling the outstanding loan, left her with R22 000 for a deposit. She took some of her savings and increased the deposit to R33 000.
- R2 305 instalment – a saving of R373 per month
- R459 on insurance – a saving of R292 per month
- R800 on petrol – a saving of R400 per month (Amanda is also watching her driving habits and taking less long drives at weekends)
Total saving: R1 065