For many buyers, the idea of planning a car purchase involves choosing the colour, wheels and options for their new ride. However, reality usually hits home when they find they are unable to afford the vehicle they’ve been daydreaming about.
There’s need to lose hope though. There is a way to ensure your finance application is successful as well as keeping your household budget in good health. This way you can easily afford your monthly commitments without relying on credit cards and loans.
“With the start of a new year, buyers might be dreaming of spending the next 12 months in their dream car, but this decision shouldn’t be taken lightly. A car purchase is not just a New Year’s resolution – it’s a five- or six-year-long commitment,” says Rudolf Mahoney, Head of Brand and Communications at WesBank. “The best way to go about planning a purchase is starting with a budget and considering all the costs associated with purchasing and owning a car.”
Start with a budget
The most important part of the car-buying journey is compiling a list of all current expenses and your income. When looking at your budget, you should take note of every expense you have, no matter how small, and subtract those your total income. The WesBank Affordability Calculator is a great tool for doing just that, and should give a clear idea of how much you’re already spending, as well as how much will be left for purchasing and maintaining a vehicle.
It is also important to shop around and compare car prices to find a deal that suits your budget. On average, a young professional who buys their first car at around the age of 25 and replaces their car every three years or so, will have financed around eight cars in their car-buying lifespan. First-time car buyers need to decide and spend wisely.
Knowing all the costs
Once you’ve drawn up a budget you should determine how much you’re willing to spend on a car. A car purchase isn’t just about the cost of the monthly instalment – there are many other expenses, which can sometimes equal the instalment itself.
The total cost of mobility includes the monthly instalment for the vehicle, the fuel bill for travel, toll fees, licensing fees, maintenance and insurance premiums.
If you plan on travelling long distances you might want to consider a vehicle with a more economical engine to help keep fuel costs in check. The allure of a performance car with a thirsty engine will fall away when fuel prices start rising. Regardless of your car choice, you should always plan ahead for increasing fuel costs.
This also goes hand-in-hand with maintenance costs: high mileage will require more frequent services. Not every car includes a service plan, and in this case the monthly budget should include savings for future service costs – saving R420 a month will be easier than facing an unexpected service bill of R5 000. One often-forgotten cost is tyres; when considering a car also look at what replacement tyres will have a reasonable cost. This is especially important given that a pothole strike could easily require a new tyre – an unplanned expense that can negatively impact a budget.
Insurance is mandatory on any financed vehicle, so this should be given careful consideration. Prospective buyers can ask insurance companies to provide a quote for the vehicle they are considering, to ensure that the premium fits in with their monthly mobility budget. Although a grudge purchase for some, a monthly insurance premium is far cheaper than paying for expensive accident repairs out of pocket. And in the event of theft, insurance cover avoids a consumer having to pay instalments for a car they no longer own.
All of these costs should factor into the kind of car being considered. A car with an affordable purchase price may have high service costs and fuel usage, while a slightly more expensive vehicle could have a maintenance plan and an efficient engine.
Account for inflation
After deciding on a deal, and considering expenses such as fuel and insurance, buyers should still leave enough leeway in their budgets to accommodate rising costs and other emergencies.
Fuel price increases can quickly add up to have a negative effect on your monthly budget. Fuel prices are on the up, and expected to continue climbing through 2017 based on the performance of the rand and rising international oil prices. Should the fuel price increase by R1 or R2 per litre, your total monthly fuel spend could increase between R200 and R400 if you fill up four times a month.
These factors are not predictable, so it’s safer to leave enough room in a budget to absorb these costs. Additionally, rising costs should also be expected in other areas. Food prices and general inflation will also take away from your disposable income.
Once you’ve decided on a car and have done all your budgeting homework, look at how you’d like to structure your finance contract. A shorter finance term will mean higher monthly repayments, but paying far less in interest fees. Additionally, you will be able to trade your vehicle in sooner, while it still has an excellent resale value on the second-hand market. WesBank’s Vehicle Payment and Insurance Calculator lets you play around with all the variables for structuring your contracts.
A longer finance term can help if you want lower payments and less pressure on your monthly budget. The maximum contract term is 72 months, so you should carefully consider your future needs over the six-year period, and whether you would want a financial commitment for that long.
The easiest and smartest way to reduce monthly instalments is by paying a large deposit on your car purchase. This is essentially a lump sum initial payment that lowers the amount of money you have to borrow from the bank. Borrowing less money also means paying less overall interest.
If absolutely necessary, you can consider using a balloon payment. This is a large amount, like a deposit, but only paid at the end of the contract. This means that after 60 or 72 months of paying instalments this large payment will still have to be made.
“If buyers remember to save up every month, they can avoid the shock of a balloon payment,” says Mahoney. “A balloon can be used to help lower monthly instalments, but they should be considered as a last resort and used wisely.”
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