Buying a car for the first time

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Buying a car is one of the dreams of many people. More often, when it comes to cars, emotions play a bigger role on influencing the choice of the car. In our society owning a car is normally associated with a high status. Some jobs may even require an employee to have a car especially consulting jobs. Therefore, buying a car for the first time is one of the most important decisions you need to make as a young person.

What you need to know

There are a lot of things about car buying that most young people are not aware of. Let us discuss some of the important things that need your attention.

Driver’s license

It may seem trivial that you need a driver’s licence before you start thinking of buying a car but in most cases majority of young people do not even think about this.

It may be a challenging task to get a driver’s license because of the cost of driving lessons. Despite this, getting your license at least two years before you get your first car can save you a lot of money on insurance. In the insurance world, if your license is less than two years, you are classified as a risk client. This explains why many cars are registered in the name of parents to cut the insurance bill. However most insurance companies are aware of this. Therefore, the insurance may increase the excess (the money you are expected to pay when you claim) that you need to pay if the driver involved in an accident is not the one registered on their database.

Insurance

We have already mentioned about insurance above. Before you drive your car home, you may need to insure it. As a new driver, there is a higher chance that you may be involved in a car accident. Imagine losing your car immediately after leaving the dealer? Hence, it is very important to make sure your car has insurance.

There are several types of car insurances but for new drivers, it is beneficial to consider comprehensive insurance. This type of insurance covers damages caused by accident, theft, fire or other events. In addition, if you damage another person’s car, you will still be covered under this type of insurance. Please take note that some insurers have a limit to the damage they can pay if you hit another car or someone’s property.

Furthermore, if your car is an old second hand car, it may not be viable to have a comprehensive insurance. You may consider taking a third-party insurance that only pays for the damage you can make to other people’s properties. Make sure you make up your mind about the insurance that is best for you before buying your car for the first time.

Depreciation

A new car loses about 20% – 25% of its value immediately after leaving the car dealership. This lose of value (depreciation) is what makes people lose money when they sell their car within few months of purchase. Depending on the model of the car you are buying, depreciation is around 25% for the first year and 20% for the second year. The rate of depreciation will decrease with age of the car.

This explains why second hand cars are cheaper than new cars. If you are planning on changing your car in less than 2 years after purchase, then you may consider buying a second hand car.

On-the-road costs

In South Africa, most car dealers will add an extra charge on top of the advertised price of the car. These additional charges are called “on-the-road” costs. This covers the delivery fuel, car license registration, certificate of road worthiness (in case of a second hand car), pre-delivery inspection and other administration costs like paying the cleaner who removed dust from your car.

Therefore, you need to budget for this extra cost. Contact your dealer for more information about these costs. These costs varies with dealers.

How to finance your car purchase

Now that you know the car that you want to buy, and you can not wait to drive that awesome machine! It is time to talk about the purchasing method. This is very important to consider when you are buying a car for the first time.There are several methods you can use. Let us discuss the three common methods which are:

1. using a personal loan,
2. financing with a car loan,
3. cash purchase.

It is worthy pointing out that the difference between the first and the second method is that if you take a personal loan for a car, you will pay more interest. This is because the car is not used as collateral and it does not belong to the creditor but the owner. When you take a car loan, the car will only belong to you after paying all the money you are owing to the creditor.

Comparing the payment methods

Assumptions:

• The car cost is R 170 000.
• The interest rate for a car loan is 12% compounded monthly.
• Loan initiation fee is R 1 200.
• Payments are made on monthly basis.

Defining two methods as follows:

• Option A – Financing the car purchase by using a bank.
• Option B – Buying a car on cash.

Under option A

Let us evaluate the cost in 3 years. By using the amortization formulae we get:

1. Monthly car installment amount = R 5 686.29
2. Total car installments (inclusive of interest) = R 204 706.43
3. Total interest paid = R 33 506.43 (total car installments – Loan amount (inclusive of initiation fees))

Under Option B

If you buy your car on cash, you will only pay R 170 000 now. However, you will not pay any interest and all the loan initiation costs. Therefore, you avoid paying total cost of R 34 706.43 (total interest + initiation costs).

All in all, the decision to buy a car can not be rushed. You need time to know what you really want. Is it comfort you want? Is it convenience at a cheaper cost that you desire? How often do you want to drive your car? Is traffic congestion bad in your area? How safe is your area (considering that many cars are stolen every year in South Africa)? For how long are you expecting to use that car? Can you afford the car you want? These are some of the things that need to be considered before making up your mind on the model of the car. Congratulations on buying a car for the first time!

If you find this post interesting, you can also read my posts on investing for the first time and building the habit of saving and investing.