To start with, will you buy a new car, or a second-hand one? This is important, because the car’s age will influence your finance application.
For instance, Absa does not offer instalment finance for cars older than five years. WesBank is limited to cars less than 20 years old worth at least R30,000 when bought from a private seller.
Then you’ll have to decide whether to buy from a dealership or a private seller. A private deal might be cheaper, but you will have to ensure that the car won’t give you problems.
A dealer, on the other hand, will give you a degree of protection in the form of a warranty, but you’ll pay more.
Then you have to decide what car you want, what extras you have to have – and whether you can afford it. This will involve considering how much deposit you can put down and how much you’ll have to pay back a month.
A smart way to prepare yourself for car ownership is to put the car instalment you feel you’re comfortable paying into a notice account every month for a couple of months. Can you cope?
When you’re ready to buy your car, you can take the money you’ve set aside and include it as part of your deposit.
If the car you want costs R150,000 and you opt to pay it over 60 months (five years), and put down a R15,000 deposit (10%), your monthly instalment would be R3,003. This is if the interest rate is 12%. Over 60 months, you will pay back R180,180.
If you save that monthly instalment for five months so that you can provide a R30,000 deposit, your monthly instalment (at the same interest rate) would be just under R2,669.33. This would mean that, over 60 months, you will pay R161,959.80.
Considering the total cost – deposit and instalments – you will wind up saving R5,000 if your deposit is larger.
Banks also offer the “balloon payment” option, but this can end up costing you a lot more than you’d planned to spend.
With the same R150,000 car, if you choose to put down a 10% deposit and make a R45,000 (30%) balloon payment at the end of your agreement, your monthly instalment will be lower, at R2,452. But add up the deposit, the balloon payment and your monthly payments, and the car will end up costing you R192,120. That’s still less, however, than the R195,180 it will cost you if you merely put down a 10% deposit and pay the R3,003 a month for five years.
And make sure you can still pay to maintain the car, if interest rates increase (if you have a variable interest rate), petrol prices rise, insurance increases, you get speeding fines, or lose your job.
Insurance is compulsory with instalment sale agreements. There are three types of insurance:
- Comprehensive cover, which will protect you from loss or damage in accidents, theft, hijacking, natural disasters and fire. It also comes in handy when third parties make a claim against you for damage you are responsible for;
- Third-party, fire and theft insurance. Covers some of the same things as comprehensive policies, but you will not be covered if you’re involved in a car accident. You will have to pay for those costs from your own pocket; and
- Third-party insurance. The cheapest, only covering the damage (and associated costs) you have caused to someone else’s vehicle.
You may be able to get cheap insurance, but you want to avoid having to pay a fortune for repairs should you be involved in a car accident.
If you don’t have an emergency savings fund, you’ll have to pay for the repairs on credit – which will cost you far more to pay back.