Having plied his trade in the finance industry for 20 years (during which time he worked for Accenture, Discovery, FNB and Wesbank), Alan Quinn has an intimate understanding of vehicle finance. He uses his invaluable knowledge to offer the best-considered advice to buyers who are looking to purchase their first new car.
If there ever was a time to buy your first car, it’s now… With interest rates at historic lows and the vehicle market struggling due to the economic downturn, there are great deals everywhere you look!
There are many articles on the web that talk about the kinds of cars that “first-time buyers” should consider and whether they should buy new/used, etc. This article isn’t about those topics. It will focus on the small but important detail of HOW YOU ARE GOING PAY FOR YOUR FIRST CAR. If your parents are wealthy and willing to put up the cash for you to buy the car, then WOW! If this is you, then you are in an enviable position and should be eternally thankful to your mum and dad (do not forget Mothers/Fathers Day – like, ever), plus you don’t need to read any further!
If, however, you need to pay for your first car yourself, I’m about to become your “wise uncle” that offers you sage advice you need to listen to and heed… even if it’s not necessarily what you want to hear.
Did you know that, at the moment, only 30% of vehicle finance applications are being approved? That means 70% of them are getting declined. Therefore, following through with your idea to buy a new car may be much more difficult than you first thought. You need a plan with realistic timeframes and goals, so let’s build one.
The first 3 things you need to do before buying a car
- Know your Credit Score.
- Draw up a budget to know what you can afford
- Start saving
Know your Credit Score
Read first: What is a Credit Score and why is it important for vehicle finance?
Think about it, you’re about to ask a bank to lend you a lot of money over many years to finance the purchase of your car. You might have big dreams to fulfil and ambitious plans for the next few years.
Have you met the people who work in a bank (any bank), however? I am not sure they are going to be as excited about your future plans as you are. Trust me, bank employees are all business – they just want to know whether they can trust you to pay them back. Your credit score is basically a big fancy calculation that a bank gets from a Credit Bureau to work out whether they can trust you.
How do I find out what my credit score is?
Cars.co.za has partnered with a company called Just Money. They will show you your credit score for free.
Okay, now you can see your Just Money Credit Report. On your Dashboard, you will see your score and whether you are rated as Bad, Average or Good. Below that you will see which types of credit you are likely to qualify for. Look on the Dashboard for the icon for ‘Car’… We need a nice green tick on that button!
If you haven’t got that nice green tick then you need to do some work to improve that score. You’ll want to read this article on how to improve your credit score.
Making a Budget to know what car you can afford
You know your monthly income, right? Your first decision is how much of your hard-earned cash you want to spend each month on your new wheels. Have you got that figure in your head?
Tip #1: I know you want a cool car, but don’t forget you also need to have a roof over your head, you need to eat, you have other things to spend money on – like that coffee first thing in the morning. PLEASE be realistic and do this properly. If you have a figure in your head and it is more than 20-25% of your income, then you need to have a long and hard think about it.
Tip #2: Now take that figure and start subtracting other necessities from it because, once you have your car, you will need 2 things: Number 1, you will need insurance and because this is your first car, even a small “starter car” (also known as a budget or entry-level car) will cost you an additional R1 000 (or perhaps even more) per month.
Secondly, you will need to budget for fuel consumption. The car does not run on air – every now and again, the friendly petrol station attendant will expect money (and a tip) before he lets you drive off.
Now you have a new figure – the amount of money you can actually spend on the car itself each month. That is the amount you’re planning to pay to the bank each month for the loan. What we need to do now is work out the price of the car that you can afford (when you can only pay the calculated amount per month).
What car can you afford for your budget?
The first step is to find the car you think you want and see what its price is. Now, use the Finance Calculator on the Cars.co.za website to calculate the monthly payments to see if you can afford it.
On the calculator, you will need to put figures for the Vehicle Price, Interest Rate, Deposit, Residual and Repayment Period. Below is what you must think about when you do this:
Vehicle Price: Find a car you want – the price is right here on the Cars.co.za site.
Repayment Period: Easy. It’s up to you, but most people prefer 72 months.
Interest Rate: This one is a bit tougher, because the banks tell you the interest rate they want – you don’t get to decide. You are a first-time buyer and you are very unlikely to get the best rate. The rate you get depends a lot on your Credit Score. As a general rule, an “Average” credit score gets about Prime + 3%. If your credit score is not particularly good, then you will get as high as Prime + 7%.
Deposit: This is even harder. You are a first-time buyer, so banks are very likely to ask you for a Deposit of 10-20% of the value of the vehicle. That is why the next step in the plan is “Start Saving”! For now, work out 10% of the Rand value of the vehicle and put it into the deposit field.
Residual: Another tricky one. Banks will only give big Residuals to successful car loan applicants that have good credit scores. General rules of thumb for this are: if you’ve got a great Credit Score, you can go as high as 30% of the value of the vehicle as a residual. If your credit score is not great, you will be very lucky to get 10%.
Now take a look at the “Monthly Payment” – the value that comes up when you calculate the loan. Is this what you expected? My feeling is that it is probably higher than you expected and higher than your budget. You are about to hate me because my advice here is that you need to look for a less expensive vehicle and then go through the steps above until you find a vehicle that fits your budget.
Do not get all wistful about getting a killer interest rate and a sky-high residual. Please just consider buying a less expensive car that is more within your budget. You will thank me one day!
Start Saving
You are probably thinking I am being such a killjoy at this point. I have told you that you need to start managing your credit score. I have told you banks are tight-fisted and you need to forget that dream car and settle for something more practical. Now I am going to really start to sound like your parents and tell you that you need to start saving money! Unfortunately, I am right. Let me give you a few reasons:
1. Remember that I said the bank will ask for a deposit? You need to save up for that.
2. I told you that you need to think about insurance and fuel. What I didn’t mention was your vehicle licence, your tyres, maybe you will get a speeding fine or incur any number of other hidden costs.
3. Your vehicle might break down or you might have an accident (you’ll need to pay an excess if you claim against your insurance policy); having some cash aside for a “rainy day” is always a good idea.
Basically, when it comes down to it, owning a car is like dating a supermodel… They are pretty BUT they are high-maintenance and they ARE expensive. And the prettier (or more handsome) they are, the more expensive they are to maintain.
Now that I have buried an avalanche of sobering advice – Go forth and BUY!
