FIND­ING THE CAR FOR YOUR BUD­GET

Out of ne­ces­sity, South Africans are spend­ing less on their cars. While this is fi­nan­cially wise, it also brings with it new fac­tors to con­sider.

Finweek English Edition - - FRONT PAGE - Ed­i­to­rial@fin­week.co.za

peo­ple are buy­ing cheaper cars, opt­ing for sec­ond-hand rather than new, and keep­ing their ve­hi­cles for longer. This is an eco­nomic real­ity, but not nec­es­sar­ily a bad thing. Cars are a de­pre­ci­at­ing as­set and, over the past few decades, have be­come far more re­li­able on aver­age. So while eco­nomic re­al­i­ties are forc­ing many peo­ple to stretch out the life of their cars, in­creased re­li­a­bil­ity is mak­ing it eas­ier to do just that.

At the same time, how­ever, many peo­ple are find­ing that these same re­al­i­ties are re­sult­ing in car own­er­ship adding con­sid­er­ably to their debt bur­dens.

Apart from those still lucky enough to get new cars pro­vided or par­tially fi­nanced by their com­pa­nies, an in­creas­ing num­ber of peo­ple is buy­ing used cars and buy­ing cars with a re­pay­ment term of 72 months, which is much longer than the his­tor­i­cal norm, says Ge­orge Sim­i­topou­los, the CEO of carfin.co.za.

The shorter the term, the quicker you pay off both the in­ter­est and cap­i­tal, and many peo­ple pay­ing off over a longer term end up hav­ing a sig­nif­i­cant short­fall, and then rolling it over into the debt on their next ve­hi­cle, he says. Be­fore they know it, their debt re­pay­ments are un­sus­tain­able.

One of the big­gest prob­lems is that, be­fore ap­ply­ing for fi­nanc­ing, peo­ple tend to look at what they can af­ford with­out tak­ing ev­ery­thing into con­sid­er­a­tion, Sim­i­topou­los says. This in­cludes not only re­pay­ments on the pur­chase price, but also in­sur­ance, main­te­nance and ex­pected fuel con­sump­tion based on how many kilo­me­tres are cur­rently trav­elled.

Banks gen­er­ally rec­om­mend that the price of your car should not be more than 30% of your an­nual gross salary, and your monthly costs should be no more than 10%.

Other rules of thumb are that peo­ple earn­ing roughly be­tween R10 000 and R20 000 a month should limit them­selves to buy­ing sec­ond-hand cars, those earn­ing up to R50 000 should look at smaller new cars, while those earn­ings more could look at some­thing a lit­tle more lux­u­ri­ous. Only those who earn over R150 000 a month should con­sider 4X4s or sports cars.

“Banks tend to use about a third of in­come, some gross and some net,” says Sim­i­topou­los. “We tend to find that about 25% of a salary should be used as a bench­mark. That’s just re­lated to re­pay­ments,” he says. “In­sur­ance, fuel and other costs push it up to about 30%.”

He says there has been an in­crease in sales of sec­ond­hand cars. “There has also been a huge re­luc­tance to buy. We see a lot of peo­ple get­ting ap­proved [for fi­nance] re­luc­tant to take the next step.” Gen­er­ally, the bulk of buy­ers are those who need, rather than want, a re­place­ment car.

There has also been an in­crease in en­quiries about re­fi­nanc­ing and re­struc­tur­ing loans to al­ter in­ter­est rates and re­pay­ment terms and Sim­i­topou­los says car own­ers should look at these op­tions. “Banks and car deal­er­ships are in­cen­tivised ac­cord­ing to what­ever in­ter­est they charge you so the higher the in­ter­est, the higher the com­mis­sions. We es­ti­mate that a large per­cent­age of peo­ple are over­pay­ing, es­pe­cially first-time buy­ers who are buy­ing into in­stal­ments, not in­ter­est rates.”

He says buy­ers should be aware that sec­ond-hand pric­ing is go­ing up. New ve­hi­cle sales feed into the sec­ond-hand mar­ket a few years down the line, and be­cause there are fewer new ve­hi­cles be­ing sold, there is a de­crease in sec­ond-hand stock and prices are go­ing up. While it may seem like there are a lot of sec­ond-hand cars out there, these in­clude re­built cars from in­sur­ance auc­tions, which are not nec­es­sar­ily in good con­di­tion.

Sim­i­topou­los sug­gests that own­ers hang­ing on to their cars for longer than they nor­mally would have should look at ex­tend­ing their war­ranties.

Au­to­mo­bile As­so­ci­a­tion (AA) spokesman Lay­ton Beard says po­ten­tial car own­ers need to de­cide on their bud­get and stick to it. Many bud­gets are thrown out the win­dow when the per­son gets into a show­room and sees the car of their dreams. “Iden­tify what your bud­get is and don’t go over what your means are, and make sure you speak to the dealer about any po­ten­tial ex­tra costs.”

He sug­gests that whether you are buy­ing or leas­ing a car, make sure you un­der­stand the con­tract, in­clud­ing any war­ranty and main­te­nance terms.

An AA safe car sur­vey found that for peo­ple buy­ing for the first time, who are gen­er­ally young peo­ple or a par­ent buy­ing a first car for their chil­dren, price is a big fac­tor and they tend to ne­glect safety. He says such buy­ers must check that there are ad­e­quate safety sys­tems in place as ad­dress­ing this af­ter buy­ing the car leads to ad­di­tional un­ex­pected costs, not to men­tion safety risks.

An in­creas­ing num­ber of peo­ple is buy­ing used cars and buy­ing cars with a re­pay­ment term of 72 months.

Ge­orge Sim­i­topou­los CEO of carfin.co.za

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