Read this before you say “I do” to a car loan
What you need to consider before getting a car loan:
You’re about to embark on a three- to five-year journey with your beloved car. Before you apply for a loan at the dealership, are you absolutely confident that you know everything there is to know, ‘til loan do you part?
When you say ‘I do’ to your car loan you’ll need to be ready for the commitment. The car will be in your name and the loan will be your responsibility, until the full amount owed to the bank is paid off. Luckily, we are here to help you unpack the boot full of boo-boos that first-time car buyers make, so you don’t get trapped in a cycle of debt.
So what are some of the dos and don’ts that you should be aware of before you apply for your car loan?
Dos:
- Apply for a car loan that is within your budget and make provision for all the mobility costs (petrol, maintenance, comprehensive insurance and car washes).
- Make sure you saved enough to put down a big deposit. If you have a big deposit this knocks money off the purchase price, you end up borrowing less from the bank, and pay your car loan off sooner.
- Maintain a good credit history. Always pay your loans and bills on time. The bank looks into your credit history to make sure you are a good borrower.
- If you are looking at a used car, consider extending the warranty or service plan to ensure you are covered once the current plan expires.
Don’ts:
- Don’t be tempted to go above your car-buying budget. Your loan has a higher chance of being rejected because the bank can see that you can’t afford the monthly car instalment.
- Don’t be embarrassed about going for a cheaper or used car. A small car is the first step to one day owning your dream car.
- Don’t apply for a car loan just after starting a new job. Rather wait for a couple of months, as this helps to increase your stability status. This counts in your favour when applying for your car loan.
- Don’t increase the length of your car loan unless money gets tight. The quicker you pay back the loan the less you pay in interest.
Other things to consider:
Don’t get into a lot of debt right now
You’re still young – and the time will come where you can comfortably afford the repayments for an expensive house and car. But if you’ve just left university and started your first job, the best advice is to save every penny you can to set yourself up for the future.
That’s going to mean driving around in your first car for a while. Or would you rather be in a flashy car now, and struggling for the next few years? Alternatively, you could save up to buy a nice car and big house a few years from now.
Pay off your first car
There’s always the temptation to trade in your car every few years to get the latest and greatest. But if you’re still in your first car, just pay it off and drive it until it absolutely needs to be replaced. The sooner you pay off your car, the sooner you’re without debt. This puts you in a position where you can use your free cash to save or invest for the future.
Even if you do intend on replacing the car as soon as possible, a paid-up car will be more useful come trade-in time. Any money the dealer offers for your old car can be used towards the purchase of your new car. That means you borrow less money from the bank, and pay off the newer car sooner, putting you in an even better position for the next trade-in.
Remember all the costs
In the excitement of getting a new car it might be easy to forget about some other essential costs. Have you looked at the fuel consumption of the new car, and included fuel costs in your monthly budget?
Also remember insurance – a mandatory expense for car owner – and saving money for maintenance. If your new car has a service or maintenance plan this is a small financial reprieve, but certain items might not be covered. This will include tyres, which can run into the thousands depending on the type of car. Ensure your monthly budget lets you save up for this and other incidental costs.
Be patient
Remember to ask the car dealer every possible question before you structure your car loan. This commitment to your car should be the trip of a lifetime, and if you have budgeted correctly you should experience very few bumps in the road.
Try to avoid balloon payments, and choose the shortest possible term for the loan. The sooner you pay off the car, the sooner you are without this debt – and you’ll be in a better position to buy your next car.
“Longer finance periods and large balloon payments will bring down monthly payments, but there are definite disadvantages,” says Rudolf Mahoney, Head of Brand and Communications at WesBank. “Buyers end up spending a lot more on the interest over the longer period of the loan, and a balloon payment, also subject to interest, could attract even more charges should a buyer decide to refinance.”
For installment sale agreements, the following advice applies:
- D before B except if it’s C: rather put down a big Deposit before looking at a Balloon payment unless it is C
- When choosing the payment term, the lower the term, the better. This results in less paid on interest.
What exactly is a balloon payment?
A balloon payment will require you to pay a lump sum at the end of the contract period. This might require a new loan, thus extending the amount of time you are paying interest on the car. Or you might have to sell the car in order to settle the balloon payment – starting the debt cycle all over again. Try to avoid balloon payments, and choose the shortest possible term for the loan. The sooner you pay off the vehicle, the sooner you are without this debt – and you’ll be in a better position to buy your next car.
Buy for the future
You might think you have it all figured out right now, but where will you be five years from now? This is the kind of question you should be asking yourself when choosing the car you want. A zippy hatchback might sound great now, but will you need more space when you start a family? If you do, just remember to not spend too much right now, so that when the time comes to trade in you are not left in a position where you still owe the bank more money than the car is worth.
Budget carefully
The trick to budgeting is to be honest with yourself about and what you can afford. Take your salary, after taxes, and deduct every possible expense you can think of – medical aid, food, travel, and so on. The amount you’re left with will be disposable income, and you should only use about two thirds of that as your car-buying budget. This amount needs to cover the instalment, insurance, petrol and running costs. The remaining third should go to a savings account for emergencies. This is the safest way to plan your budget and ensure your car purchase doesn’t put you in financial difficulty.
Be interest aware
If you’re buying your first car it could also very well be your first credit transaction. This means that you’re likely to have no credit history, and banks will be hesitant to lend you money at a low interest rate. Your credit profile, and credit score, are used to determine the interest rate you receive. Factors that influence this include: how long you’ve been working for your current employer; how long you’ve lived at your current address; whether you own property and whether you’re married. If your life shows signs of stability you’re considered to be a low-risk borrower, and you can look forward to a better interest rate.
Be credit courteous
As a young car buyer and credit-active consumer you have the opportunity to build a pristine credit profile. This means making all your payments on time, and in full. It also means ensuring that you don’t live on credit. If you borrow as little as possible and always pay back on time, you’re saving money – and also showing that you’re reliable. This is attractive to banks, and your good reputation will put you in a position to easily obtain credit in the future.
Source: WesBank