Can You Afford A New Car?

Tips and tricks to save you a bundle!

- Caitlin Geng

According to many financial experts, buying a new car is a bad investment – writer and fintech entrepreneur Sam Beckbessinger even refers to cars as a ‘money bonfire’. However, buying a new vehicle may benefit you in other valuable ways, if you take the right approach. Ramit Sethi, best-selling author of I Will Teach You to be Rich (Hodder & Stoughton), disagrees that a new car is a waste of money and outlines the right way to go about it with what he calls the ‘20-4-10 rule’. This, he maintains, will help you answer the big question you should be asking yourself before purchasing a new car: can you afford it?

20 MAKE A 20% DOWN-PAYMENT

Most of us can’t afford to buy a car outright and need to secure financing for it. Lenders usually require a downpayment, which Sethi advises that you calculate as 20% of the car’s total value. So, for example, if you want to purchase a car for R200 000, you need to be able to pay R40 000 as a deposit. If you can’t do that, you should look at more affordable cars, or postpone buying one until your finances improve.

4 TAKE OUT A FOUR-YEAR TERM LOAN

People usually take out auto loans with a term of about 72 months (six years). According to Sethi, this is too long. He recommends taking a four-year term loan (48 months), which will minimise interest. If the loan payments are unmanageable in your current financial situation, you need to find a more affordable vehicle.

10 SPEND A MAXIMUM OF 10% OF YOUR MONTHLY INCOME

Sethi advises that the maximum amount you spend on your car each month should be 10% of your monthly salary and should include monthly payments, insurance, petrol, repairs and even traffic fines. Again, if this percentage is unmanageable, you need to find a cheaper car.