Buying your very own first car is a big deal, so before you take the leap, think about how it's going to hit your pocket. Read on to find out how to finance your first car and what to budget for.
The key to a stress-free first-car-buying experience is figuring out what you can genuinely afford. Imagine driving around in a dope sedan or SUV but living on dry bread and water to keep it. Not cool at all.
And it's not just the purchase price – you need to maintain the car too. Your salary, credit score and deposit amount (remember, as a first-time buyer, you won't have a trade-in) will all influence what you can afford.
Bear in mind that the car's sticker price typically excludes on-the-road charges like the roadworthy certificate, dealer administration fees, registration fees, the number plates and so on.
Some dealers will even charge you for the pre-delivery inspection, carwash and first tank of petrol. The best way to deal with it is to ask the dealer to list all the costs upfront so that you (a) know what to expect, and (b) have a chance to negotiate those costs away.
If you can't afford to pay cash for the car (and right now not many people can!), you'll have to get vehicle financing. There are a few options, but each comes with its own pros and cons.
Most buyers opt for an instalment sale where you pay a deposit upfront, followed by monthly payments over a predetermined period (typically around six years), after which the car is all yours. If it's a new car, it'll come with a service and maintenance plan, meaning you'll only need to add insurance. But, remember, if it's a second-hand model and the plan is expired, you'll have to see to both the maintenance and insurance costs yourself.
If you're battling to raise the upfront deposit required for an instalment sale, you do have the option of balloon payments.
'A balloon payment is a convenient solution designed to assist the buyer with cash flow at the start of a finance agreement,' explains Lebogang Gaoaketse, head of marketing and communication in the Motor division at WesBank. 'A portion of the purchase price is set aside in order to lower monthly repayments. However, it's important to remember that this deferred amount will still be owed to the bank at the end of the contract term. Balloon payments require discipline to be used effectively, and customers opting for this arrangement should make sure they're saving enough cash every month to settle the debt once the instalment period is complete,' he says.
Read more: Is a Balloon Payment Right for Me?
Don't want the hassle of actually owning the car? Let's say you're looking to move overseas in a few years' time. A full maintenance lease (FML) is an option that allows you to rent a vehicle for an agreed period. Though these leases are usually for commercial vehicles, you can, as an individual, get one from a long-term car-lease company or similar, but not a car dealer. You pay a monthly fee that covers all maintenance costs (including services and parts that regularly need replacing) and, at the end of the term, you return the car. You have the option to get another car to rent, provided you kept your end of the bargain with the last one, or you can walk away from the deal.
The upside is that monthly payments are lower for an FML than for an instalment sale, and you'll get a different vehicle more often. The downside is that you'll never actually own the vehicle. Some contracts may also place a steep per-kilometre rate after you've driven a certain distance every month, meaning you may find it too expensive to use the vehicle for those long, December-holiday drives.
Then there's the guaranteed buy-back option, where you and the bank agree on a figure at which the car can be bought back at the end of an agreed payment period. Again, the monthly payments are lower than those of an instalment sale, but there are strict Ts & Cs regarding upkeep and mileage, and you'll be responsible for insuring the car. So, you won't get to take this one rallying at any point...
Want to explore more for yourself? Hippo's vehicle finance comparison tool is your one-stop shop for your needs. (And if you already have a vehicle and are looking to restructure your loan, look into the vehicle refinance comparison tool as well.)
So let's talk about that car insurance, then. As you will have seen, quite a few of these vehicle-financing options require you to insure your car.
'Too many motorists have an "it won't ever happen to me" attitude when it comes to their vehicles. There's no insurance on the vehicle, and service and maintenance plans are not a priority [to them],' David Chard, managing director of AA Warranties, warns.
Don't be fooled into thinking that you'll be able to pay for spare parts or mechanical work out of your pocket.
Chard says, 'What you budget for parts and labour is often out of step with actual pricing. This is not being dramatic, but a reality based on years of experience and customer horror stories.'
Here's one such story: according to AA Warranties data, two of the most common expenses that car owners claim for are complete engines and complete gearboxes. A gearbox replacement can easily cost as much as the average white collar worker makes in a month! So, yes, not exactly an out-of-your-pocket expense.
Are you looking for a better deal on your new car's comprehensive car insurance? Hippo's car insurance comparison tool makes it very easy for you to see what your options are. Try it!
This article is for informational purposes only and should not be construed as financial, legal or medical advice.