There’s such a good feeling owning a new car. It has all the reasons why you should have it! With the new technologies and stylish designs and you in control what else is there?

Well, there is a reality check which needs to be considered. Cars cost you a lot more than you think. You keep paying long after:

The feeling has gone

The great feeling of owning your new car soon diminishes but the financing still lives on. The longer the period of repayment the more this problem extends itself.

The value has gone

R100 000 financed over 5 years @ 10% costs 27,5% more. 

Cars lose value at an alarming rate of around 20% per annum yet you are still committed to paying at 10%. Effectively, pouring money into something which keeps depreciating. The problem is exacerbated if interest rates rise during the period.

The opportunity has gone

Interest payable means you owe. Interest earned means you earn. The sure way to building wealth is compounding your own interest on your investments. So obviously, the less you pay the bank the more you pay yourself. 

Don’t be alluded with the deals.

Drive now – pay later. Take the car now and only start paying later. These deferred payments have the interest factored into the monthly installments when you start paying. The Bank still gets its money.

Ballooning reduces the monthly repayments but you still pay the interest on the residual. So it’s not free money. The bank still gets its money under the guise of lower instalements.

Buy a car you can honestly afford

Let’s face it. Cars in the main are a social symbol of success. Ironically, you show off what you are prepared to lose.

The bottom line is if you finance a car with a residual or deferment you are probably are buying something you can’t actually afford. The car you can afford is in the price range where you can put down a healthy deposit and pay it off comfortably in a shorter period of time. The monthly instalments should be budgeted for in a way that they are lower than your monthly savings. 

Uber verses Ownership?

Perhaps its a better option to Uber. Taking into account the extra costs of insurance, maintenance, licensing and petrol you could do far better without a car. You could calculate the monthly cost of owning a car and compare this with using Uber to get around. In many cases there are huge savings to be found. A broad brush calculation on a R200 000 car is R160 per day. This allows you Uber usage of R4 800 per month with the convenience and no worries about parking. Think about it?

Your home loan application is probably the largest and longest loan you will make in your lifetime. We all aspire to having our own homes instead of renting from a landlord  – (which pays off his property). 

There are some important considerations to understand before planning to buy. 

Your credit worthiness 

Banks will want to be assured that you can afford the loan over the period. 

Build this up with a credit card, paying off the full balance on time every month before the due 

date which avoids any interest. You do not have to max out the card during the month. Just be in a position 

to pay it off comfortably at the end of every month. After a while the credit card company will recognise your 

credit worthiness and invite you to increase your available credit. This in turn will improve your worthiness with the banks. 

The banks will scrutinise your financial stabilty

How long have you been employed? – The longer the better.

How much do you earn? – The more the better.

What are your current debts? – The less the better.

What is your disposable income after your monthly costs of living? – The more the better.

Your home securitises the loan

Banks work will lend a percentage of the market value of your home (loan to value).

Generally, they will lend up to 80% of their assessment of the value of your property. This subsides the risk should you default as they have 20% of the value to play with when having to sell off to recoup the loan. Banks will own your property until you pay it off. 

So, to improve your loan application you should aim to have more than the minimum deposit of 20%. If you qualify on the 20%, take it and put the extra savings into the access bond once it is registered. 

Follow the 30% rule

Your repayments should not exceed 30% of your monthly income inclusive of other debt repayments.. If you have other debts, these should be paid off as much as possible to improve your application for a bond. 

Buy a home you can comfortably afford

Don’t get enticed into buying up to the maximum you qualify for.

Take into account probable interest rate hikes over the period of the loan which should not threaten your affordability. Ideally, if you buy a smaller property you can pay off sooner by increasing the monthly instalments.

A home you can comfortably afford and pay off sooner is a key aspect of a sound financial plan.