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Many consumers might dream about walking into a dealership, falling in love with the latest model on the showroom floor, and driving home in a new car but buying on an impulse should be avoided.
While the scenario above is not quite realistic, its consequences play out all the time: consumers buy first, and are later surprised by the additional expenses associated with car ownership.
Rudolf Mahoney, head of research at WesBankank said: "Consumers are easily blinded by the temptation of a new car parked in the driveway, and don’t carefully consider the bigger picture.
DRAW UP A BUDGET
"The ideal car-buying journey shouldn’t start in a showroom, but rather on a budget spreadsheet. Affordability and aiming for a debt-free lifestyle are more important than impressing the neighbours."
Affordability calculators, such as those on the WesBank website, allow consumers to accurately calculate their monthly expenses to arrive at a disposable income figure – the money they can spend on anything they please. There may be a temptation to use the entire disposable income amount as an indicator for a vehicle repayment, often forgetting about the fuel and insurance costs that are also part of the car owning journey.
Although banks have measures to prevent reckless lending – which include requesting information about a consumer’s income, expenses, and credit record – these cannot account for changes in an individual’s lifestyle or budget.
If the local economy starts struggling or the rand is affected by the strength of international currencies, living costs will increase and start eating into consumers’ positive cash flow.
FINANCE CONTRACT
Once a buyer has determined how much they can realistically spend, each month, they can look at how they would like to structure their vehicle finance contract. They can choose to repay a loan over a shorter amount of time, to pay less interest get out of debt sooner, or to extend the contract to 60 or 72 months, to afford a more expensive car.
Monthly instalments, insurance costs, and fuel are not guaranteed to remain the same for the duration of the finance contract – the interest rate today might not be the same two years later. Fuel prices can also fluctuate wildly, and insurance premiums are not always guaranteed to go down in line with a vehicle’s value.
Consumers planning to buy a car should also consider future expenses, and plan for emergencies. Although many new vehicles are offered with service and maintenance plans that take care of annual servicing costs, these plans do not cover costs for replacement tyres.
Even though tyres can last for two years or more, road hazards could damage one and leave drivers needing to replace one or more tyres – an unplanned cost that could run into the thousands.
INTEREST RATES
Interest rates should also be accounted for in budgets. WesBank expects the prime interest rate to rise slowly over the next few years, which will see monthly installments increase for buyers who chose to use a linked interest rate on their contracts. The best way to minimise the amount repaid in interest is to finance a vehicle over a shorter term. Paying off loans as soon as possible is the best thing for a buyer’s budget.
Wesbank's Mahoney again: "With a budget plotted out, and enough 'fat' built in for rising costs and emergencies, car buyers will be better equipped for the future, a little planning and some modesty will result in real savings, and better prepare consumers for one day owning their dream car."
