Do your finance homework before buying a car

©georgerudy via 123RF

So advises Nicholas Nkosi, head of vehicle finance at Standard Bank’s Vehicle and Asset Finance (VAF) division, who says that buying a new car, should be planned - especially when it is considered that after a person’s home, a car is the most expensive asset that people will buy.

“The difference between the two, however, is that the value of a car declines over time, while that of a home usually increases. This is something that should always be borne in mind when hard decisions have to be made about the wheels you want to park in your driveway - especially if you are considering paying off a vehicle over 72 months.

“Taking time out to think through the purchase of a new car will pay dividends. You will avoid the pangs of ‘buyer’s remorse’ that can set in when the true financial implications of a purchase set in, and will avoid the stress of pushing your household budget over the edge,” says Nkosi.

He adds that the things to consider before buying a vehicle are:

• What the total cost of ownership will be:
- A car must be maintained and insured. You may crave a 4x4, but your homework could show that quality tyres for your off-roader could set you back between R10,000 and R20,000.
- If, for example, you can afford to pay a total of R4,000 per month, the instalment would be much less. Your budget should cover all your additional expected expenses. If it doesn’t, consider a cheaper vehicle.

• Knowing exactly what is covered by a service or maintenance plan:
- Expensive surprises should be avoided. Finding out that brake pads or other parts are not part of the service plan could make a big dent in your income.

• The cost of insurance. Don’t go for a higher excess payment to reduce monthly premiums, as you could find yourself with a massive bill before the car is even touched by a panel beater.

Ways of reducing and controlling your monthly payment include:

• Putting down the biggest deposit you can. The higher the deposit, the less capital you will have to pay back and the less interest you will pay.

• Setting aside the equivalent of the new car’s payment for several months will give you an idea of whether you can afford the car. If this goes well, you can use the money you have saved for a deposit.

• If you can, avoid buying a car with a high residual or final balloon payment requirement.

• Plan for increased interest rates by using spare cash to add to the vehicle’s specified monthly payment. This ensures that if interest rates rise, you have already compensated for this by paying extra every month.

• Asking your bank if it offers car loans at a fixed interest rate. Using this option could cost you about 2% above the going rate, but will provide you with financial certainty.

• Think about leasing a vehicle, with the option of retaining ownership at the end of the contract. There are various types of leases, including full maintenance leases. This may cost more, but will cover all expenses for a set monthly price for the duration of the contract.

• The difference between instalments over various payment periods can be fairly low. Ask the dealer or bank to calculate the costs of various repayment options. You could save yourself months of repayments and interest costs.

Other considerations

“Most people buying a new car opt to take the vehicle over the longest payment term possible (now 72 months) as this reduces the level of monthly repayments. Although this thinking is valid, it does have other implications,” says Nkosi.

“The longer the finance period, the longer it takes for the settlement value to reach break-even point with the asset value, due to depreciation. This means that it will take longer before you can trade in your car. When you finance a vehicle over 72 months that break-even point is closer to the end of year four, while a lot of people want to trade in their cars after three.”

“If your sums don’t work out, consider downsizing to make a new vehicle affordable. Buying a pre-owned vehicle also becomes an option. A car’s value usually depreciates fastest during its first two years on the road. You can save thousands in capital and interest costs by buying a low mileage car that has passed this milestone. You will often also benefit through maintenance or service plans that have some time to run before they expire.”

Electing to buy a diesel vehicle instead of the petrol-driven equivalent will result in better fuel consumption, which is something to consider given escalating fuel costs. Although balloon payments and residual value plans do add to the cost of a vehicle, they can help you acquire a car if you believe that buying now will avoid having to pay a higher price for the same vehicle in future.

“The golden rule, though, is to make sure that you do not spend more than you can afford.”