F or many buyers, the fantasy of getting a new set of wheels – sometimes with a few nice extras – can overtake the reality of having to pay for said vehicle. Whether it’s a babe- magnet or a mom-van, getting external car financing is not always a given. And nobody likes that notice from the bank that reads: 'financing application declined'. It sort of sucks all the joy out of reading a letter from the bank.
The good news is there’s no need to abandon your dreams of a hot new ride. There are many ways you can make sure your application for car finance goes through without a hitch – while keeping your household budget fat and happy enough to buy talcum powder and baby bags. Bonus.
The important thing to remember here is that when you buy a car, it’s a six-year commitment to make payments of a certain amount, every month, exactly on time. Sound daunting? It doesn’t have to be.
?WesBank’s Rudolf Mahoney, head of brand and communications, says: “The best way to go about planning a purchase is starting with a budget and considering all the costs associated with owning a car.” So, let’s do that...
Start with a budget
Step one, make a list of two columns: 1) your current household income and 2) all your current expenses (even the small stuff). What’s that chocolate habit costing you per month, hmmm? The point here is figuring out what you can afford to spend over and above your niggly problem with Lindt balls. Sometimes, this will mean sacrificing a few things every month
that you can actually do without (like an extra 10 shades of green nailpolish, for instance).
Subtract all the column-two stuff (expenses) from your current household income (column one). Check out the WesBank Affordability Calculator; it’ll give you a clear idea of how much you’re already spending and how much will be left over for buying and maintaining the new mom-van that you have secretly already named The Thunderhawk.
Once you’ve done all that, it gets a bit easier. Now that you know what you can afford to pay every month, shop around! It is important to compare car prices – as many as possible – to find the right deal for your budget.
So here’s an interesting stat for you: on average, a young professional who buys their first car when they’re about 25 years old, and replaces their car every three years or so, will have financed about eight cars in their life (before the golf-cart years). First-time buyers must spend wisely. That’s where investigating comes in.
Know all the costs
Once you have your budget, give yourself a massive pat on the back – that was the hard part. Now, you can determine how much you are willing to spend on a car. Really think about it, though; buying a car isn’t just about the monthly instalment. There will be many other Thunderhawk- related expenses, which can sometimes be equivalent to the instalment itself.
Think about fuel efficiency – the cost of petrol for the distances you typically travel in a month will also make a dent in your household budget, not to mention
that fuel costs don’t exactly remain static. What about toll fees and licensing fees? Then there’s regular car services and repairs to keep The Thunderhawk healthy. And don’t forget insurance premiums.
Remember, maintenance costs are related to mileage, so if you’re a door-to- door door salesman, your ride will require more frequent services. Not every car includes a service plan, so your monthly budget should include some savings ring-fenced for future service costs. Saving R420 a month will be easier than coughing up R5 000 for an unexpected service and repair bill.
And don’t forget your tyres. Look at what replacement tyres are reasonably priced for your car. This is especially important given how easily a pothole could ruin your day.
Insurance is mandatory on any financed vehicle. So ask insurance companies to give you a quote for the car you’re considering. This way, you can ensure that the premium fits your wallet. Although a grudge purchase for some people, a monthly insurance premium is actually cheaper than paying for accident repairs out of your own pocket. And if some inconsiderate thief steals The Thunderhawk, imagine having to keep paying monthly instalments on him. But good insurance will have your back here. We’re big fans of less stress.
Account for inflation
Now that you have a particular deal in mind – and you’ve thought about all the regular stuff like petrol and maintenance – you should still leave enough leeway in your budget to accommodate rising costs.
Although interest rates have remained relatively stable over the last year, a hike in the rate will mean a higher monthly instalment. Additionally, fuel price increases will increase the monthly mobility cost, so it is wise to leave a bit of a cushion to absorb the impact of these costs.
Structuring contracts
So you’ve done all the homework, now you can look at how you’d like to structure your finance contract.
A shorter finance term will mean higher monthly repayments, but paying far less in interest. Also, you’ll be able to trade The Thunderhawk in sooner, while he’s still valuable on the secondhand market. WesBank’s Vehicle Payment and Insurance Calculator will let you play around with all the variables for structuring your contract. Useful, no?
A longer finance term will help you lower the payments and puts less pressure on your monthly budget. The maximum contract term is 72 months, so you should think about what it means for you to take on a six-year financial commitment.
The easiest and smartest way to reduce monthly instalments is by putting down a large deposit. This is essentially a lump sum initial payment that lowers the amount of money you’ll have to borrow from the bank. Borrowing less means paying less interest over time.
You could also consider making a balloon payment – which is a large amount that you pay at the end of your contract, but think about it carefully, because you’ll have to save up enough money every month to make that balloon payment meaningful.