[Rek jou cheque] Stop driving up car costs: In tough times, here are some tips to pay off your new or pre-owned vehicle
South Africa’s tough economy has caused a sharp drop in new car sales over the past year, with more people choosing to buy pre-owned vehicles.
According to WesBank’s Business Intelligence data for the first half of 2024, they received 337 061 applications for vehicle finance for new cars, in comparison to 688 316 applications for pre-owned cars.
While people are still making application for vehicle finance, new and pre-owned – many find themselves struggling with monthly repayments, even within the first year.
Standard Bank says that many first-time car buyers do not consider the impact of interest rates when purchasing a car and said that roughly 5.7% of first-time buyers fall behind with their repayments or change to a more affordable car in the first year.
Doret Jooste, Standard Bank’s Head of Money Management and Advisory says that the industry has recorded an increase in these cases in recent years.“It is common for first-time buyers to be caught off guard when interest rates rise. In recent years, the rising cost of living has made this situation even more challenging,”
Standard Bank provided the following tips for first-time car buyers:
Cost
A common mistake people make when purchasing a car, is basing their purchase on the highest monthly payment that they can afford. As a rule of thumb, allocating up to 20% of one’s monthly income to all car-related expenses is best.
“If your monthly income is R25,000, your car instalment should be lower than R5,000 to make room for insurance and fuel costs,” said Jooste.
The role of a down payment
The size of a down payment plays a huge role in keeping your monthly instalments below your maximum budget. It is best to try and and have 10% to 20% of the car’s price as a down payment to lower the size of the loan you’ll need
The length of the loan
An instalment sale agreement can allow someone to repay their loan plus interest for up to 84 months, with one able to add a balloon payment to lower repayments. You can defer the payment of the balloon amount as the last repayment amount.
It is also worth noting that customers who cannot afford to pay a balloon in full at the end of a loan term can also respread and pay off the amount over a period of 12 to 36 months.
The type of interest rate
Talk to your bank about the different types of interest rates and how they affect your monthly repayments.Fixed rates offer predictability and protection from rate hikes but are usually higher.
While prime-linked rates can be lower, they pose a risk of higher repayments if rates rise, complicating budgeting.
The dangers of not paying a loan back on time
Failing to pay your monthly vehicle instalments can negatively affect your credit score and chances of accessing further credit.
If you intend applying for a vehicle loan, here are some things to consider:
How much can you afford
The first step in calculating your budget is finding out how much you can afford to spend on a car.
To do this, take your income (after taxes and deductions) and subtract all your monthly expenses such as food, rent, airtime, subscriptions, insurance and the like.
All these costs need to be deducted from your total income to arrive at your disposable income.
This is the money that can be used for luxuries, savings or essential credit, such as monthly car instalments.
You can do your budget manually, or via your banking apps and other digital budgeting tools.
Remember the extras
Remember that affording a car isn’t just about settling the monthly instalment.
If you have calculated that you have R5000 to spend on a vehicle after paying all other monthly expenses, you will need to use that amount to cover the instalment and other essentials.
Fuel and comprehensive insurance cover are examples of ongoing monthly expenses that need to be budgeted for.
If your vehicle doesn’t have a service or maintenance plan, you should also consider putting some money aside each month to cover regular maintenance costs.
It is advisable to allocate between half and two-thirds of your budget to your monthly vehicle instalment, with the remainder allocated to the additional costs.
For example, if you have R5000 a month to spend on a car, between R2500 and R3000 should be used for the instalment repayment, with the remainder going towards fuel, insurance and maintenance costs.
The bigger your deposit, the better
It’s not always necessary to pay a deposit, but doing so will work in your favour in the long term.
Paying a deposit reduces the amount of credit required for the transaction, which means lower monthly repayments, less interest and improved affordability
Having a deposit for a new car can improve the success rate of your application
Remember to take your other debt into consideration
The NCA requires the bank to take all credit facilities into account when you apply for vehicle finance.
Nobody wants to go through the trauma of having their vehicle repossessed. Carefully consider your financial situation before committing to taking out vehicle finance.
dailyvoice@inl.co.za