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 are owned. Interest earned means you own. 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 fooled The deals on offer are enticing.
Drive now – pay later. Take the car now and only start paying later. These deferred payments have the interest factored into the monthly instalments when you start paying. Bank gets its money. Balloon payments reduce 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 instalments.
Buy a car you can honestly afford.
Let’s face it. Cars in the main are a social symbol of success. Ironically, you display what you are prepared to lose.
The bottom line is that if you finance a car with a residual or deferment you 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.