/ 7 June 2010

How a R200 000 car could cost you R400 000

Makgaba asks: As a recent graduate should I buy an expensive R200 000 car that I like or settle for a cheaper car for R120 000?

Maya replies:
The answer lies in what you can really afford and understanding the true cost of that car over five years.

Last week I spent some time with a 26-year-old who is earning a good salary yet is caught in a debt trap. In all likelihood he will have no choice but to go under debt counselling.

He believes that the reason he finds himself in this situation is because the minute he started earning a salary he took on debt and bought all those things he had dreamed about during those years of study. He felt he deserved to splash out a bit.

The reality is that he simply could not afford it and all he can say now is that he wished he had started saving from his first pay cheque — it would have changed his life.

What can you really afford?
When calculating your affordability you need to draw up a monthly budget of all your expenses. Go over your bank statement over the last three months to make sure you have included everything — including your cash withdrawals.

This budget must include savings equal to at least to 20% of your salary (this can include your company pension contribution). Also identify any medium-term goals you have, like buying a home or travelling, which you want to save towards. Include the insurance costs of the car as well as petrol and maintenance costs.

The real cost of a car
The R200 000 option: Assuming an interest rate of 11,5%, you will pay R4 400 a month in repayments for five years. Total cost = R264 000

The R120 000 option: Assuming an interest rate of 11,5%, you will pay R2 640 a month for five years. Total cost = R158 400

If you opted for the cheaper car and rather saved the R1 760 difference every month in a growth investment that gave you a 10% return per year, you would have saved R136&nsp;000. So in effect the R200 000 car would cost you R400 000 (R264 000 + R136 000).

A lump sum of R136 000 would be equal to a 10% deposit on a R1,3-million home.

Important things to know:

  • The dealer may encourage you to take a 72-month repayment period or a residual (where you have a lump sum left at the end) to make the monthly costs more affordable. Never agree to this, the long-term interest costs are very high and if you can’t afford to pay off the car over five years, you can’t afford it — period.
  • A car is a depreciating asset and loses value very quickly. As you drive it out the dealership it drops by 25% in value, so what you owe on the car will always be more than it is worth. In fact your R200 000 car will be worth R150 000 seconds after you have started driving it.
  • Second-hand cars are therefore a good option; you may still be able to buy the car you want, just three years older. Personally I have never bought a new car, preferring to allow the depreciation to give me the car I want at a lower price.
  • If you have a dream car in mind, make this something you aspire towards that you can buy one day when you have “made it” and with a very large deposit.