Car Finance: What Can I Really Afford?

You found the car. The finance was approved. But three months later, between the instalment, insurance, fuel and a service, your budget is falling apart. A car is often the second biggest purchase people make, and it is easy to get wrong.

What is happening

Qualifying for finance only means the bank believes you can pay the instalment. It does not mean the car is good for your budget. The real monthly cost includes the instalment, comprehensive insurance (which banks require on financed cars), fuel, tyres, services, repairs, licence renewal, tolls and parking.

Watch out for the balloon or residual payment. This lowers your monthly instalment by leaving a large lump sum to pay at the end of the loan. For example, a R250 000 car over six years at 12.5% costs about R4 950 a month, and about R356 600 in total. Add a 30% balloon and the instalment drops to about R4 250, but you pay more in total and still owe R75 000 at the end. Many people then refinance the balloon or trade in the car and roll the debt into a new one.

Longer terms do the same thing: smaller instalments, bigger totals, and a car that may be worth less than you owe for years. A common guide is to keep total car costs under about a fifth of your take-home pay. When buying second-hand, get the car checked by an independent mechanic. Dealers must meet the quality standards of the Consumer Protection Act, while private sales are often 'voetstoots' (as is).

Signs to notice

• The salesperson talks only about the monthly instalment.
• You are offered a balloon payment to 'make it affordable'.
• The loan term is six years or longer.
• You have not got an insurance quote yet.
• You would need to stop saving to afford the car.

30-second self-check

Answer yes or no.

• Would total car costs be more than about 20% of your take-home pay?
• Does the deal include a balloon or residual payment?
• Is the finance term longer than five years?
• Would you have no emergency savings after the deposit?
• Have you skipped getting an insurance quote before signing?
• Do you still owe money on your current car?

0-1 yes: The car looks affordable. Confirm the total cost, not just the instalment, before you sign.
2-3 yes: The deal may stretch you. Try a cheaper car, a bigger deposit or a shorter term, and run the numbers again.
4 or more yes: This car is likely to put real strain on your budget. Pause before signing, and consider a less expensive option.

What you can do next

• Today: Get the full quote: price, interest rate, term, balloon, fees and extras like credit life and service plans.
• This week: Get an insurance quote and estimate fuel and maintenance. Add them to the instalment and compare with your budget.
• This month: Compare a cheaper model, a larger deposit or a shorter term. If you already have a balloon, start saving for it now.
• Extras like paint protection and extended warranties are optional. Ask for them to be removed if you do not want them.

Your tool

Car Affordability Calculator - enter the price, deposit, rate, term and balloon to see your instalment, total cost and full monthly running costs against your take-home pay.

When to get professional help

Speak to someone if you cannot keep up with car payments, if a balloon is due and you cannot pay it, or if you believe you were sold a defective car. Car debt can create real pressure at home, and it helps to talk it through.
Who can help: Money coach, FSCA-authorised financial planner, FSCA-authorised insurance adviser, consumer attorney

Getting help in South Africa

The National Credit Regulator (ncr.org.za) handles complaints about vehicle finance under the National Credit Act. The National Consumer Commission (thencc.org.za) and the Motor Industry Ombudsman of South Africa help with disputes about defective cars and dealer conduct. The Credit Ombud (creditombud.org.za) assists with credit disputes. Your Cleared Mind EAP can connect you with a money coach.