When buying a car, few people are fortunate enough to pay cash. After your house, it is probably your biggest financial commitment and a big-ticket item on your budget.
Before you start pounding the showrooms or flipping through the AutoTrader, you need to know exactly how much you can afford, especially now that the government has made it clear that car allowances will be a thing of the past.
Paul Lessing, sales consultant at a motor vehicle dealership in Rivonia, says the mistake most people make is that they look at the price of the car rather than the monthly affordability. “People need to work out how much they can afford to repay because this will determine what car they will buy,” says Lessing. He also says what most people don’t realise is that they don’t have to break the bank to buy the car of their dreams — as long as they have patience. By upgrading every three years they can begin to afford a more expensive model without a major increase in salary, especially as car prices have stabilised.
For example, if you earn R20 000 a month, you can probably afford to purchase a car worth R200 000, which would cost you about R4 300 a month over 54 months with a 10% deposit. If you have a vehicle allowance and qualify for the prime lending rate, you would pay R4 400 a month, without a deposit, and you can finance over 60 months. The same applies if you are a business owner or a graduate.
Lessing says after three years the trade value of the car would be about R120 000, depending on the condition of the vehicle, and the outstanding settlement would be about R70 000 if you had put down a deposit.
If you sold the car you would have R50 000 as a deposit for a new car. If your salary just kept up with in flation you would be able to afford R5 700 a month, and with a R50 000 deposit you could upgrade to a car worth R280 000.
The main thing to remember is that if you can afford a deposit, use it, because this will not only lessen your instalments but will also save you on interest. For example, if you purchase a R200 000 vehicle and put down a 10% deposit you will save almost R6 000 just on interest over the financing period.
However, if you are an impatient, A-type personality and can’t wait three years for the souped-up version with all the bells and whistles, you could opt for a residual payment.
Lessing says, because of the resale value a vehicle retains, a residual can work in your favour, but you need to be careful and do your numbers.
A residual works on the basis that a portion of the cash price of the car is kept as a single payment at the end of the payment period.
According to Lana Terblance of finance house WesBank, if your budget for the instalment of the car is R5 000 a month but the car of your dreams costs R300 000, you could use residual financing by keeping 30% or R90 000 as a balloon payment at the end of the 54-month instalment period.
If, for example, at the end of the repayment period the car’s resale value is R150 000, you could sell the car, make the lump-sum repayment of R90 000 and still have R60 000 as a deposit on a new car. Or you could re-finance the R90 000 over a two-year period.
According to WesBank, because you are not reducing the balance on the balloon payment, the interest bill starts picking up. By using a residual plan in the above example you would pay extra in interest payments if you extend your contract over a period of 2 years.
However, Lessing warns that there are conditions that come with residual payments. “Your resale value will be determined by the condition of the car, which includes the number of kilometers travelled and whether the car has been damaged in an accident.” If you travel a great deal the high mile-age will count against you and you may not get your expected resale value.