- Affordability doesn't just mean being able to pay the monthly instalments – there are many other costs involved in owning a car.
- Cars are generally not assets and don't maintain their value, so a big advantage to buying a used car is that someone else has paid most of the depreciation for you.
- Older cars are at risk of breaking down, and flashy new ones can attract the attention of criminals.
- Read more articles about finance News24 Business top page.
The improper use of credit has upended the traditional driver's rite of passage, with young people often driving luxury cars only to find themselves driving old cars in middle age.
Buying an expensive car at the start of life and putting everything you have into it may prevent you from building more permanent assets such as investments or saving to buy a property. As you get older and have greater demands on your assets, repeatedly making the decision to buy the most expensive car you can with the credit a lender will give you may leave you much poorer than if you had bought a more modest car.
By doing the proper research, shopping around, and using common sense, you can avoid this trap.
Here are some things to consider on your journey to car ownership.
How much repayment is possible?
Because very few people can afford to buy a car outright, you'll likely need to take out an auto loan to buy a car, which means paying back both principal and interest every month.
While this may be your biggest expense in driving a car, remember that it isn't your only expense and you'll need more than just the instalments to keep using your car.
A handy guideline used by many financial advisors is to look for a car with payments that don't exceed 15% of your net monthly income. Car loan lenders may be willing to lend you more than this amount. The amount they'll lend you will depend on your income, ability-to-pay assessment, and credit report.
Additional costs
Aside from finance costs, you also have to pay for gas, insurance, maintenance, annual registration fees, parking fees, and prepare for repairs due to breakdowns, collisions, and even natural disasters.
Fuel: If you know how far you plan to drive, you may be able to calculate your monthly fuel costs. If you already own a car and are upgrading to a larger vehicle, consider how much your fuel costs will increase.
Auto Insurance
Insurance is not a luxury in South Africa as the chances of getting into an accident or having your car stolen are high, so premiums are expensive.
Comprehensive insurance covers you against accidents, fire and theft. Coverage against fire, theft and third party damage (damage caused to someone else's vehicle in an accident) is cheaper to get. However, this exposes you to the risk of damage to your own vehicle being involved in an accident, which is the biggest risk.
If you buy a car on a loan, you'll need insurance before you drive it. The loan company will probably give you a quote, but you don't have to accept it. Get other quotes as well. Ask about coverage limits, deductibles, and whether roadside assistance and rental of a loaner vehicle are included.
It is important to know if you have the following insurance:
- Retail Price: The price at which dealers sell the model.
- Market value: the amount it can be sold for your Choose a car based on the year and mileage.
- Trade-in Value: The average price a dealer will trade your car for.
- Consider top-up insurance to cover the difference between the amount insured and the amount still owed on your loan contract. If your car is stolen a few months after you buy it and the amount insured is less than the principal amount owed, you could end up paying for a car you don't own.
maintenance
Maintaining a car isn't cheap: everything from the radiator to the wipers to the brakes has a lifespan.
Generally, the more expensive the vehicle, the more expensive the parts will be. Depending on the local availability of parts, the cost and hassle of servicing or repairs may also increase.
Credit Life Insurance
Your auto finance company will likely require you to take out credit life insurance to cover repayments in the event of your death, disability, or dismissal.
The perfect car for you
Make a list of what you need in a vehicle and what you want in a vehicle: something reliable and cost-effective for driving long distances for work, something suitable for a growing family, a sporty two-door for just you or your partner, four-wheel drive for weekend getaways, etc. What safety features are essential to you?
Evaluate vehicles against your list and take all costs into consideration: can you afford to buy what you want, or only buy the car that meets your needs?
Take your time to research, ask questions, and test drive many cars. Don't be afraid to ask to see under the hood and test all the doors and windows. Ask about gas mileage, safety ratings, and get insurance quotes.
Keep an open mind, and you might find that an up-and-coming brand that's half the price is not a good fit for you compared to a big-name, expensive brand.
Is it second hand or new?
There's a famous story that a new car is worth half the value when it drives off the dealership: While the depreciation might not be 50 percent, a new car still loses a significant portion of its value by the second day.
Buying a used car means someone else is paying for most of the depreciation. Unless you're buying something rare or collectible, a car is not an asset and doesn't retain its value.
Demo models (new cars that are on dealer shelves and sold at a discount because they have been test driven by potential buyers) have low mileage and are in like-new condition, but cars with 1,500 km on the clock can qualify for a 10 percent discount.
If you're buying a new car, be careful about agreeing to extras: do you really need a sunroof or a fancy in-car entertainment system that will add thousands of dollars to your repayments?
New cars may come with a maintenance plan, which can be a great deal. But be sure you understand what the plan covers and when it expires. If it doesn't, inquire about adding one and evaluate the cost against the savings, keeping in mind that there will likely be fine print about what is and isn't covered. If you're buying a used car, find out all you can. Go online and read reviews about the brand, model, year and dealer/sales outlet.
ask a question: Does it have a full service history? Has the car had multiple owners? If it's such a “nice little car,” why hasn't anyone owned it for over a year? If you use a dealer, ask for a check to prove the vehicle hasn't been reported stolen or tampered with since being scrapped.
What are the mileages? Wear and tear is a big factor in a car's reliability. Most car parts have a limited mileage. If you are buying a fairly old car that “never breaks down”, chances are all of the parts are nearing the end of their lifespan.
If possible, get a second opinion from someone who knows cars.
Find out what you need to transfer the car into your name. Do I need a roadworthy permit? The seller may tell you not to worry about a warning light on the dashboard, but a roadworthy centre could reject the vehicle because of it.
Don't be afraid to ask for a better price, especially if you're buying from a dealer.
Does that make you safer or less safe?
The existence of a plethora of cheap online ride-hailing services is causing many people to rethink personal car ownership, but car ownership remains a safety issue for many South Africans.
If you're worried about safety, an older car that may break down isn't the best choice, but a flashy new car that attracts attention may also be more dangerous — in fact, many people simply avoid the brands most prone to theft altogether.
Whether you need a car to feel safe, to make you feel good, or simply to get from point A to point B, choosing carefully could save you a lot of money and a lot of regret.
This article was first published on SmartAboutMoney.co.za, Initiatives by the South African Savings and Investment Association (ASISA).
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