Cape Town - Owning a car is a major step towards independence but there are major financial implications you need to be aware of.
Do you know the difference between fixed and linked interest rates? What about balloon payments?
If you are looking into buying your first car, here are a few things you need to know:
1 Debt can wait
You’re still young and the time will come where you can comfortably afford the repayments for an expensive house and car. If you’ve just left university and started your first job, rather save every Rand you earn. That’s going to mean driving around in your first car for a while - even if it's your folks' old car. Or, you could buy a low-budget car now and be saddled with debt or alternatively, save up for a better vehicle and not have to struggle to pay it off.
2 Pay off your first car
There’s always the temptation to trade-in your car every few years to get the latest and greatest. You could stick with your first car, pay it off and be without debt. This puts you in a position where you can use your free cash to save or invest for the future.
Wesbank says: “Even if you do intend on replacing the car as soon as possible, a paid-up car will be more useful come trade-in time. Any money the dealer offers for your old car can be used towards the purchase of your new car. That means you borrow less money from the bank, and pay off the newer car sooner, putting you in an even better position for the next trade-in.”
3 There are many costs involved
In the excitement of buying a new car it’s easy to forget about some other essentials such as fuel insurance (a mandatory expense for car owner) and maintenance.
If your new car has a service or maintenance plan this is a small financial reprieve but certain items might not be covered. These include tyres, which can run into the thousands depending on the type of car. Ensure your monthly budget lets you save up for this and other incidental costs.
4 Be patient
Try to avoid balloon payments and choose the shortest possible term for the loan. The sooner you pay off your vehicle car, the sooner you are without debt.
Rudolf Mahoney, head of brand and communications at WesBank, said: “Longer finance periods and large balloon payments will bring down monthly payments, but there are definite disadvantages. Buyers end up spending a lot more on the interest over the longer period of the loan, and a balloon payment, also subject to interest, could attract even more charges should a buyer decide to refinance.”
5 For instalment sale agreements, the following advice applies:
• D before B except if it’s C: rather put down a big Deposit before looking at a balloon payment unless it is Critical.
• When choosing the payment term, the lower the term, the better. This results in less paid on interest.
A balloon payment will require you to pay a lump sum at the end of the contract period. This might require a new loan, extending the amount of time you are paying interest on the car. You might have to sell the car in order to settle the balloon payment – starting the debt cycle all over again.
6 Think long-term
You might think you have it all figured out right now but where will you be in five years? This is the kind of question you should be asking yourself when choosing the car you want. A sporty hatchback might suit your needs now but you might need more space if you’re thinking of starting a family?
If you do, just remember to not spend too much right now, so that when the time comes to trade-in you are not left in a position where you still owe the bank more money than the car is worth.
7 Budget carefully
The trick to budgeting is to be honest with yourself about and what you can afford.
Take your salary (after taxes) and deduct every possible expense you can think of – medical aid, food, travel etc. The amount you’re left with will be disposable income, and you should only use about two thirds of that as your car-buying budget.
This amount needs to cover the installment, insurance, petrol and running costs. The remaining third should go to a savings account for emergencies. This is the safest way to plan your budget and ensure your car purchase doesn’t put you in financial difficulty.
8 Applying is easy
When you’ve done all your research, know what car you want, and have calculated that you can afford it, applying for finance is as simple as visiting the dealership. A Finance and Insurance (F&I) representative is also able to give you sound advice, and can explain everything about the car loan application process to you.
9 Be interest aware
If you’re buying your first car it could also very well be your first credit transaction. This means that you’re likely to have no credit history, and banks will be hesitant to lend you money at a low interest rate. Your credit profile, and credit score, are used to determine the interest rate you receive.
Factors that influence this include: how long you’ve been working for your current employer; how long you’ve lived at your current address; whether you own property and whether you’re married. If your life shows signs of stability you’re considered to be a low-risk borrower, and you can look forward to a better interest rate.
10 Be credit courteous
As a young car buyer and credit-active consumer you have the opportunity to build a pristine credit profile. This means making all your payments on time, and in full. It also means ensuring that you don’t live on credit. If you borrow as little as possible and always pay back on time, you’re saving money – and also showing that you’re reliable.
This is attractive to banks, and your good reputation will put you in a position to easily obtain credit in the future.