Letting your dream get in the way of reality can quickly turn your shiny new wheels into sleepless nights. A common mistake is to consider only the purchase price, resulting in a potential cash flow catastrophe.
Before you sign on the dotted line, consider the full cost of buying and running a vehicle. The following article unpacks this.
Tip: Considering a new car? Protect your asset here.
Day-to-day costs of running a vehicle
We all want to drive the “nicest” vehicle we possibly can. However, we must take into account the day-to-day costs of running a car, cautions Kriben Reddy, vice president of Auto Information Solutions for TransUnion Africa.
“The instalment itself may seem affordable, but you must cover all additional costs, such as insurance, petrol, and maintenance. Rule of thumb - double your instalment cost. If you can still afford it, knock yourself out. If not, it’s back to the car sales websites.
“Fuel costs are easy to calculate,” Reddy continues. “How many kilometres do you generally drive every day, week, and month? It’s the same with insurance - get the best quote, and there’s your monthly payment,” he says.
If you have a service plan, budgeting will be easier. If not, work out how often you’ll need to service your vehicle based on your estimated mileage, and try to stash some cash away for this.
Find out the type of tyres your proposed car uses, and the mileage people usually get out of such tyres, and factor that into your budget, Reddy advises.
Cost of an extended loan term
To lower your monthly instalment, you may decide to pay off your new wheels over a longer period.
“Generally, vehicles are financed over 48 or 60 months, but we’re increasingly seeing periods of up to 72 months (six years),” notes Reddy.
As enticing as it may seem, extending the term can mean a lot of additional interest. As an example, Reddy gives the following breakdown for a VW Polo financed at R400,000, with no deposit, at an interest rate of 9%.
- Over 72 months, your payment will be R7,210 per month – total R119,000 in interest.
- Over 60 months, you’ll pay R8,303 per month – a saving of nearly R20,000 in interest.
- Drop that term to 48 months, and the monthly repayment is now R9,954 – a total of R77,000 in interest.
Your new car would cost you a whopping R42,000 more if you financed it over 72 months compared to 48 months. It all depends on your circumstances, but make sure you do the sums, advises Reddy.
Balloon payments
Reddy says to be careful with balloon payments if your sole purpose is to lower your instalments. “They make the car seem much more affordable now, but you don’t want to come to the end of the term and find yourself saddled with a lump sum that you may have to refinance.”
Dumisani Zwane, sales executive at Nedbank’s vehicle finance division, Motor Finance Company (MFC), says choosing a balloon payment does not necessarily mean a buyer can’t afford a vehicle. “It may simply mean that you have other expenses you must take care of first and that you will have more disposable income later to deal with the balloon payment.”
Zwane continues, “A balloon payment is similar to extending your repayment term and has the same effect regarding the interest you will pay.
“A R100,000 loan over 60 months with a 20% balloon payment means that R20,000 is deferred to the end of your term. You then have a choice to pay the outstanding amount at once, or to renegotiate another loan agreement to pay it off over 12 or 24 months.”
How to qualify for a lower interest rate
Zwane says the secret to a lower interest rate is to be financially responsible. “People who manage their credit well and have a good credit history pay less interest. This positively impacts their total loan amount and monthly instalments.”
Reddy adds that an excessive monthly instalment will impact your creditworthiness if it makes you default on other payments.
“That’s an absolute no-no. A poor credit record will affect your ability to get credit in the future for things you really need, like a house or a loan for your kids’ education.
“Paying what you can realistically afford won’t negatively impact your lifestyle as you won’t have to cut back on other areas of spending to afford your car.
“If you’re already in a high-instalment agreement, try renegotiating the term with your finance house. If you haven’t bought yet, rather err on the side of caution,” Reddy says.
Tip: Do you qualify for vehicle finance? Click here to find out.