4 ways to start your engines the financially savvy way when buying a car

Picture yourself driving your dream set of wheels, inhaling that “new-car smell”. The best part? Not having the dark payment and financing cloud hanging over your head. Who doesn’t love the idea of rolling around town in a brand-new ride?

But, we can all agree that purchasing a car is not as easy as buying a litre of milk at a spaza. Because you lose 10 percent of the car value when you drive out of the dealership, you have to find the method that’s best suited for your pockets.

1. Avoid debt

Wealth manager at Sim Wealth Thandekile Moloko, and financial planner at Nedbank Ronnie Mapaya, both advise that you pay for your car in cash, if that’s an option for you.

“It’s a no-brainer that the most ideal way of purchasing a car would be through upfront cash. Financing it through debt is only viable if you have no financial means to buy it in cash,” Moloko says.

This will save you a lot on interest, and give you the chance to negotiate for a lesser price. Mapaya adds, “Going the debt route means that you are essentially buying a depreciating ‘asset’ for a higher amount than its actual worth because you are paying interest.”

2. Consider a car loan?

Although the above-mentioned is the best option, not everyone is lucky enough to afford a car in cash. However, there are various financing options available. These include hire purchase loan (car loan), rent-to-buy as well as using credit facilities such as getting a personal loan, mortgage bond or even using your credit card. The downside to all of these methods is that they include interest payments.

So, Mapaya emphasises the importance of requesting a shorter payment term in order to avoid paying more interest for the outstanding debt. Compare the different methods of financing as well as the interest rates available to you because this will determine how much you pay back, and save on your car.

“A longer term means more money is repaid, and this is a fact that escapes a lot of people,” he says.

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3. Avoid balloon payments

“When purchasing a new car through debt, you need to save up for the deposit. This will reduce the time period left to pay it off, and subsequently reduce the interest,” Moloko says.

You should also try to steer away from any balloon payments.

“This may sound like a good deal, however, it may impact your finances when the balloon payment is due. If you’re unable to pay it, most financing companies will give you the option to refinance. This means you’ll be paying more interest on a vehicle that has already decreased in value,” she explains.

4. Get great value for your money

The most important outcome in buying a car, other than convenience and those sweet joy rides, is getting value for money.

“Value is measured through the increase in asset value, being ease of mobility, income-generating opportunities or even emotional value,” Moloko says.

Driving your dream car, and smiling at every corner knowing that your finances are covered is the best you can hope for, or a goal you can work towards achieving. You just need to make the right financial decisions before you buy that car.