If you are looking at buying a new car or a used car, it's important to choose a car that you can afford to spend money on. This article highlights the factors you should consider before buying your next car.
How much do you earn?
Affordability is the most important factor to consider when buying a new or used car.
The car you are able to afford should be based on your income and how much you are willing and able to spend on a car on a monthly basis. Consider the following,
- Net Income - Your take home' salary after tax deductions,
- Disposable Income - Net income minus monthly expenses.
*Tip: The general accepted rule of thumb is that you should not spend more than 20% of your total income on car payments.
Example of how much to spend on a car
When calculating how much you can spend on a car, it's important that you allocate funds proportionally according to how much you earn. If you over-spend, you will accumulate debt over time and put your financial security at risk.
|Net Income p/m
||R 15 000
|Monthly Expenses p/m
||R 10 000
||R 5 000
||R 3 000
||R 2 000
It's also worth remembering that paying your monthly finance for a car is only one of the many costs associated with owning a car. Let's take a look at some of the other costs of car ownership.
What costs should you consider before buying a car?
- Purchase Price - The price you buy the car for will affect how much you pay every month. The more expensive the car, the more you can expect to spend in monthly instalments.
- Down Payment - The more money you pay upfront, the less your monthly instalment will be. You can trade-in your current vehicle or sell it privately which can contribute towards a larger down payment.
- Interest Rate - Higher interest rates generally mean higher monthly instalments.
- Financing - The length of your financing term will determine your monthly instalment.
- Insurance - Your monthly insurance cost will depend on the type of car you choose to drive and your driver risk profile.
- Maintenance - Car maintenance is expensive and every car will have its own maintenance costs. Some cars are more expensive to maintain than others.
- Fuel - The fuel price and the distances you travel will influence the cost of owning a car.
- Depreciation - The car you buy will lose value over time. Different cars depreciate at different rates.
- Fees - Car registration and licensing fees will add to the cost of owning a car.
*Tip: Consider all the costs associated with owning a car before buying a car. This will give you a realistic indication of what car you can afford to spend.
How can you save money when buying a car?
Buying a car is expensive and can easily become a financial burden. To save money when buying a car, consider the following,
Pay cash for the car if you can. This means that you won't have to worry about monthly instalments and crippling interest rates.
If you can't pay cash for the car, you will have to finance the car. Aim to pay off your car as quickly as possible at the lowest interest rate you are able to obtain.
- Short financing periods (24 months) generally translate into higher monthly instalments at a higher interest rate,
- Long financing periods (48 months -72 months) generally translates into lower monthly instalments at a lower interest rate,
- Long financing periods are expensive because you pay more interest over longer periods of time,
- Take the time to shop around for the best car finance you can find.
- Try to make your down payment as large as you possibly can, you may even be able to apply for a shorter financing period.
- No down payment often leads to an 'upside down loan' which means that you owe more than what the car is worth. Avoid this situation at all costs.
Choose the right car
- Consider buying a used car with low mileage that is one or two years old,
- Used cars are generally cheaper than new cars,
- Used cars depreciate slower than new cars.
- Buy a car that you need and can afford rather than buying a car that you want and can't afford.
*Tip: If you can't afford a car, don't buy a car.
The amount of money you choose to spend on a car will depend on your personal financial situation and how much you are willing to spend on a car. Remember, buying a car is expensive and you should therefore buy a car that you are able to afford and maintain over time without compromising your financial security.