POINTS TO PONDER: Before buying a vehicle, consider whether you can pay monthly installments and the interest accrued. Image: iStock
Cape Town - A new vehicle can is one of the most important financial decisions you can make. There are major financial implications to consider before considering which model you’d like to purchase.
'Fit for purpouse'
WesBank SA’s head of research Rudolf Mahoney said: “Before purchasing a vehicle, make sure that it is affordable and you are able to comfortably repay the installment of the loan.
“Consider your credit profile. In terms of the National Credit Act, all credit providers must report the status of all accounts to the credit bureau. It is therefore extremely important for any credit active individual to pay all accounts on time every month.
“By managing your credit accounts in this way, you help to ensure any future credit endeavours run smoothly.
“Perhaps the most practical advice is making sure that the car you intend buying is ‘fit for purpose’ - in other words, making sure that the car you buy suits the practical use that your vehicle is intended for as well as your monthly budget.
"For example, if you are on a tight budget, it may be important to pay attention to the average mileage you travel per month and the car’s fuel efficiency, against the ever-escalating cost of fuel.”
Practical tips for buying a car
1 Total cost of ownership
You should not base your affordability solely on your vehicle's monthly installment. WesBank’s research shows that in the actual monthly installment of an entry level car accounts for less than 50% of the total cost of ownership. Prospective buyers should budget for fuel, maintenance and insurance before deciding to buy a new car.
2 Buying new or used
A used car can appear to be cheaper than a comparable new model, but over the long term the cost of maintaining a used car will add up. In contrast, most new cars are sold with a maintenance or service plan. A maintenance plan offers peace of mind that you won’t have any out-of-budget expenses to maintain the car.
3 Paying a deposit
Paying a deposit results in a lower monthly installment and also allows you to finance the car over a shorter period. This means that if you so choose, you can trade the car in sooner.
4 The repayment period
Choosing a longer period reduces the monthly installment and this may initially appear attractive, but it accrues more interest.
In addition, the longer the period over which the car is financed, the longer it will take for the settlement value to reach break-even point with the asset value due to depreciation. In short, this means that it will take much longer before you’re able to trade in your car.
5 A balloon payment or not?
A balloon payment is an inflated final installment. It allows you to pay reduced monthly installments, but results in the previously mentioned break-even point to be significantly extended.
We also find that customers sometimes tend to forget about this inflated amount at the end of the contract, which can then turn into a nasty surprise.
6 Fixed or linked interest rate:
Usually when interest rates are low, most customers opt to use a fixed interest rate, which sets the rate for the duration of the contract. When interest rates are high, most customers opt for linked interest rates, meaning that the rate of interest repaid on the vehicle every month will be linked to the prime rate.
Once you have decided upfront on a fixed or linked interest rate, your chosen option is set for the duration of your contract.
7 What about insurance?
There are a number of value-added insurance products to choose from. These include products relating to the car itself, for example service or maintenance plans, tyre insurance and dent and scratch protection.
There is also shortfall cover, which protects you in cases where your insurance does not pay your claim in full. There are also various personal insurance products such life, disability and unemployment cover.
Having a thorough discussion with a Finance and Insurance specialist will help you make the most informed decisions.