Buyers who are in the market for a new car should budget for more than just the purchase price and running costs. Being prepared for change – whether it’s planned or not – is a worthwhile exercise. This is one of the reasons that WesBank advises all car buyers to buy well within their means, and leave room in their budgets for savings and unexpected expenses. A little forward planning can go a long way to ensuring that today’s car purchase doesn’t become tomorrow’s worry on wheels.
We live in a world full of risk and uncertainty. Some uncertainties can be more costly than others if not managed. We are not saying that you should be paranoid or obsessively compulsive in the face of life’s changing events, they just happen. It is, however, always a good idea to have a plan, an emergency fund and a well mapped budget should you happen to go on a detour.
While the only thing worrying you at the moment might be whether your car loan will be approved by the bank, there are other key factors you should also consider. No one knows what the future holds, so you need to be prepared for whatever might come your way, so you don’t get trapped in a cycle of debt.
Some of the life changing events that car buyers need to think about before buying a car are:
- A growing family – When you bought your car, you may have been single and decided a two-door sports car was the hotrod for you. Two years later, you are starting a family and it has just dawned on you that a baby seat isn’t going to fit in the space where your sound system lives. Or perhaps you meet someone who already has a child or two – and you decide to blend families. Life has changed and you may need to look at selling your sports car to buy a family car to suit your new lifestyle.
- Divorce or separating from your partner – This is another life changing event that not only influences your budget, but could also have a huge impact on your car-buying journey. When you separate from your spouse you are left with a single income, which means you will be paying for your car repayments, petrol and all the other associated costs yourself.
- Fluctuating interest rates – When the interest rate increases, you will pay higher car instalments that eat into your budget. Following an interest rate increase you will need to adjust your spending.
- Losing your job – The job market is very fickle at the moment – so what happens if you are retrenched? This is definitely something you couldn’t have known or planned for. If you are retrenched and don’t have an insurance policy in place, you are still expected to pay the bills. It’s a very worrying time, but you need to let the bank know immediately before you miss any car payments. When you are upfront the bank can modify your repayment plan to help you afford your instalments.
- Being a victim of crime or having a serious car accident – As they say, rather be safe than sorry. When you signed your finance contract you promised to have your car comprehensively insured for the unforeseen. This would include events such as a hijacking or a car accident. Any one of these traumatic events could impact your finances, especially if you have cancelled your car insurance. When paying off your car loan, you will need to confirm you are insured comprehensively at least once a year. WesBank has partnered with Hollard and Direct Axis (DA) to confirm the status of its consumers’ insurance on the 12- and 24-month anniversaries of their finance contract.
If you decide to cancel your car insurance you place yourself and your budget at risk every time you are on the road. If your financed car is stolen or written off in an accident, you will still have to pay back the money you borrowed from the bank. That’s a lot of stress, so rather just make sure you’re covered by comprehensive insurance. Car insurance may seem like a grudge purchase, but it is better to be fully insured than deal with the emotional and financial pressure of paying back the outstanding debt owed to the bank.
These are just some of the uncertainties of car finance. The ‘ideal’ car you want today might not be the ‘ideal’ car that suits your lifestyle or your financial situation in five years’ time. It’s a good idea to consider these life changing events before you commit to a bumpy five year journey that could hold some interesting unforeseen events.
“Always look at your car purchase as a timeframe. WesBank’s data shows that more consumers are choosing to finance their car over 72 months (six years). So you need to ask yourself what might happen during that time that could affect your budget or choice of car,” says Rudolf Mahoney, Head of Brand and Communications at WesBank. “If you plan on marrying and starting a family, make provision for these costs in your household budget. And also ensure that the car you’re looking at has room for a baby seat and a pram. A little bit of planning could save you a lot of money in the long run.”
You should consider the changes that have taken place in your life over the last five or six years. Now consider how those changes would’ve affected your vehicle purchase, and credit position – and apply the same logic going forward. Six years ago the prime interest rate was 12% and fuel cost less than R8 per litre. Today it’s a completely different picture. Although interest rates have come down to just 9.25%, they are expected to increase again. And the fuel price has risen to more than R12 per litre at the moment – after peaking at more than R14 per litre earlier this year. These are just two examples of costs that can fluctuate and influence your budget.
There are many other examples of changing circumstances that could impact your budget and choice of car – not all of them are pleasant, and they cannot be planned for. Getting married or divorced, getting promotion and a raise or being retrenched, the arrival of an unplanned bundle of joy or a death in the family – all of these will all have a direct financial impact. There are short- and long-term insurance products to manage these situations, and they should be considered where possible. An income protector policy can alleviate some of the financial burden if you lose your job, allowing you to keep your car. And a life insurance policy can help your loved ones take care of debts after you’ve passed.
Even theft or hijacking can leave you with unexpected bills. It is mandatory to have comprehensive insurance on a financed vehicle, which will provide financial cover in such instances. However, an insurance company will only pay out for the market value of the vehicle and this may be less than the outstanding loan amount, leaving an additional amount that will still have to be settled. A gap cover policy can be used to pay this shortfall. WesBank has found that buyers in financial difficulty often choose to cancel their insurance. For this, we have developed a product known as an Outstanding Debt Protection (ODP) policy, which covers the remaining debt on the vehicle in case of theft, hijacking, or a write-off. Sometimes just paying the excess (which fluctuates) can negatively influence your financial situation.
These insurance products bring stability to monthly budgets. For example, add-on warranty and service plans, when financed, will remove the sting out of maintaining your car at the dealership. You can include these costs in your car loan amount, which will lead to a slightly higher monthly payment. But it also means you don’t have to plan for an added expense come service time. Similarly, paint and wheel protection policies can be added to your car loan to ensure the vehicle remains in tip-top condition, externally. Fixing paint chips, windscreen cracks and repairing wheels can involve large repair bills.
“A healthy buffer should be built into monthly budgets to account for any changing costs, such as interest rate hikes and fuel prices,” says Mahoney. “When planning your budget and considering these products, speak to the Finance and Insurance representative at the dealership. These individuals are appointed by WesBank and registered with the National Credit Regulator. They have to comply with the FAIS (Financial Advisory and Intermediary Services) Act, which means they have to provide the correct advice and analyse all your needs to recommend appropriate add-on products. They will point out the risks you are likely to be exposed to during your finance period, and advise you on how you can be better prepared for the unexpected.”
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