Car ownership is essential for many South Africans, but even if you don’t absolutely need a car, it sure makes life easier! The convenience of just going to where you need to be can’t be underestimated. But how much car can I afford?
First published in City Press
Cars are expensive, and an interesting calculation to do is to see how much your car is actually costing you. Or, how much car can you afford? You can do this upfront when planning to purchase a vehicle, but you won’t necessarily know all the costs involved as intimately as you do when you own a car.
Think about your monthly expenses: the instalments (if you’re still paying it off), insurance and fuel. These are generally quite similar each month. But what about maintenance, tyres, wheel alignment, the odd battery replacement and, of course, the unplanned breakdown? Try to see how much these have cost you in the past year and, depending on your administration skills, you may be able to find receipts dating back further. It’s useful to come up with an annual amount that you can try to budget monthly to cover all these extras.
Where’s your money going?
If you look at your overall expenses as a percentage of your salary, you will probably find that food, accommodation and transport are the biggest portion. It may also help you see your car expenses from a new perspective, especially if you consider your financial goals and what it is you value in life. Is driving a comfortable car more important than something else that you value? The numbers will tell you.
How much can I afford?
It’s tempting to push our limits regarding what we can afford as there is always a potential salary increase around the corner. Ideally though, you should keep your overall car expenses (including fuel) to below 30% of your net salary. That means that, if you earn R18 000 a month (after tax and deductions), you should not be spending more than R5 400 on your car.
But you should question the value that you’re getting from the car, because 30% is a high percentage of your salary. Some people argue that they spend a lot of time driving and thus need to be comfortable. You also spend a lot of time sleeping in your bed, sitting on your couch and working at a desk. Do you spend as much money on these items? Is comfort really your motivator or are you looking to impress others? There are certainly valid reasons to spend money on a car, but do question the underlying motivation.
What alternatives are there?
Some of the obvious alternatives are e-hailing services, public transport or simply pedal power. You would need to consider the costs, safety and availability of these. Convenience and travel time also play a major role, especially with a hectic family schedule.
If owning a car is essential, you could consider a cheaper second-hand car. This does not necessarily mean unreliable as one can find some very good quality cars that are less than three years old and significantly cheaper than newer models. And a decent upfront vehicle inspection can add peace of mind.
Owning a car is often a necessary expense but it should not be the cause of your financial woes. It’s easy to get overexcited about a new purchase and things may seem affordable when taking payment holidays, extended loans and balloon payments. It’s easy to ignore the affordability calculations and try to cheat the system but, in the end, you could put yourself in a rather precarious situation.
When looking to buy a car, really consider all costs and find something that leaves you with breathing room for when life throws some unexpected curveballs. When thinking about how much car can I afford, rather don’t stretch yourself to the limit as that can easily add unnecessary stress to your finances.
Some vehicle financing questions answered:
What difference does the interest rate make?
On a loan of R250 000 over five years, the instalment at 11% interest would be R5 436 per month. The same loan with a 13% interest rate would have a monthly payment of R5 688. That’s only R253 more per month, which seems reasonable, but over five years it equates to over R15 000.
What is a balloon payment?
A balloon payment is a large once-off payment that you will need to make at the end of your finance period. People often do this to lower the monthly instalments, but they seldom make plans to save for this large final payment. If the monthly instalment is already stretching you, then you won’t be able to save anything extra. Imagine paying a hefty monthly instalment for six years and then being hit with an R80 000 cash payment. See more about balloon payments.
How does a payment holiday negatively affect me?
Nothing is free. If you’re told that you get three months of no payments, it simply means that you’ll either pay the loan off for an additional three months at the end or, more likely, your monthly payments will be adjusted to make up the difference. A payment holiday makes sense when thinking about how much car I can afford as it makes things seem better. But, they’re not really.
Should one not purchase a new car every THREE TO FIVE years?
There’s a terrible misconception that you should trade in and buy a new car every three to five years. Car dealerships will always quote the depreciating costs of cars and how great their guaranteed buyback is, along with scary stories of what happens when you don’t have a maintenance plan.
The truth is that you’ll always have car debt – for as long as you stay in “the system”. You could just pay the car off, keep it for 10 years and save the difference. That would allow you to then buy your next car for cash and still have some change.