What is the true cost of buying a car?

Looking to buy a new car? Here's a simple process to help you calculate the additional costs of owning a car to see if you can afford it.

Shopping for a new car is exciting! There’s an inherent thrill in the buying process; from choosing the make, to picking the colour, to signing on the dotted line. It’s easy to get wrapped up in the excitement while neglecting the true cost of the car — the price tag plus the additional costs. Gathering these costs, however, is important to making the best decision for both you and your wallet.

To understand the true costs of owning a car you'll need to do some form of research into factors like the cost of fuel, insurance and maintenance. We know that doing the research can be a hassle, so we’ve condensed the process into an example of someone going through it themselves.

Meet Lucy*, she’s 28 and buying a car for the first time.

Being unsure of the costs and wanting to compare them with her budget, she’s unpacked all of the possible costs of buying a car.

Lucy has been looking into a 2019 Polo TSI Comfortline. It retails for R249 000. In order for Lucy to see whether it fits within her budget, she has to break down each of the costs of this specific car. The obvious first step for her is to look at what her monthly payments would be for the Polo.

*Lucy is a fictional character created just for the purpose of this explanation.

Monthly car and loan payments

Lucy could pay cash for this car but this isn’t an option for her. She’s going the route of financing the car through the bank over 60 months with an interest rate of roughly 12% (based on Lucy’s individual credit score). Her monthly payment to the bank is R5 750** per month – this amount can be split into two different costs:

  1. The cost of the actual car per month, which is R4 150 (R249k/60)
  2. The interest on the loan amount per month, which is R1 600 (R5 750 – R4 150)

For Lucy, R5 750 per month seems reasonable in relation to her budget, but then she remembers that she’s not buying her car to park it in her garage, but rather buying it to use. So, she needs to factor in the fuel, insurance, maintenance, and even depreciation.

To see how much these factors will contribute to the monthly cost, Lucy has done a few simple calculations:

Using a loan calculator, Lucy came to these numbers.

Fuel

Lucy travels around 800km per month, the polo has a fuel consumption of 4.9 l/100km and the last time Lucy checked, petrol prices were sitting at R15.84 per litre.

Having put these numbers together, Lucy calculated her average monthly fuel cost as = 800 x (4,9/100) x 15.84 = R620 per month.

Insurance

Insurance premiums typically range between 3-5% of the value of your car but because of Lucy’s profile and the specific car she’s chosen, she was quoted a premium of R630 per month. However, insurance differs for everyone — there are many different factors that are considered when finalising a premium.

Maintenance

There’s scheduled maintenance — things like services and other expendables like tyres, oil, brake pads (should be included in most service plans), wiper blades etc. If Lucy goes with the Polo, it will come with a service plan and warranty which covers most of the costs. However, not all expendables are covered by these plans. To play it safe let’s say Lucy should budget 2% of the car’s value each year for scheduled maintenance — about R4 000. That’s roughly R330 per month.

Then there’s unscheduled maintenance. This is unforeseen damage and Lucy has estimated that she should budget for 1 to 2 incidents per year that cost 7,5% of the car’s value. As a rough estimation, Lucy budgets 1.5 (incidents) x (7,5/100) x 249k= R28k a year = R2 330 per month.

The total monthly cost of Lucy’s car

Now that Lucy has ballpark figures for the factors that come with buying this specific Polo, she can do the maths to see what she can expect to pay each month for the next 60 months.

Car payment + monthly interest + fuel + insurance + scheduled & unscheduled maintenance = monthly payment

R4 150 + R1 600 + R620 + R630 + R330 + R2 330 = R9 660 per month

It’s at this point that Lucy may go, “Wooaaaaaah, this is super reasonable” or “Umm… might need to relook at my options”.

Is buying a car the only option for Lucy?

Buying a car is not the only option Lucy has. In order for her to make the most informed decision possible, she should have a look at alternatives — the likes of public transport, car pooling, Uber or two wheels (aka a bicycle). Whether these are viable alternatives for Lucy depends on her unique circumstances and her needs.

In saying this, there are a few other considerations when Lucy looks at comparing alternatives to owning a car.

If Lucy buys the Polo she will pay R9 660 per month on average for her car. This is not the same as paying R9 660 per month on Uber for the simple reason that at the end of 60 months she'll own a car in the former case and own nothing in the latter.

Let's say that if Lucy buys the Polo, and she decides to sell it after five years. It’s a fair guess that Lucy’s car will then be at 70% of its value — around R177 000. Therefore, every month from when she buys the car, she will be gaining R177k/60 = R2 950 worth of Polo. To make the monthly payments comparable to something like Uber, we therefore take the R9 660 and subtract R2 950 from it to come to R6 710.

What if Lucy…

Obviously not everyone is like Lucy. When an individual buys a car, there are many variables that will impact the price, ranging from details of the individual to the specific car in question. So to make sure we cover all of our bases let’s go through a series of ‘What if’s’ with Lucy.

What if Lucy had a trade-in or a deposit?

Lucy has a 2013 Polo Vivo that she wants to trade in. The current trade-in price sits at R80 000. If she trades this in, it will reduce the loan amount from R249 000 to R169 000. She will then plug this R169 000 into the handy calculator mentioned above to show what her reduced monthly payments would be. Banks are in favour of deposits as they see the individual as less of a risk, which in turn may result in a lower interest rate.

So let’s say the bank quotes her around R3 770 at an interest rate of roughly 11%.

The cost of the car over 60 months is R169k/60 = R2 815 per month.

The interest being charged each month is R3 770 – R2 815 = R955.

If we go back and look at the original monthly car and interest payments, they were R4 150 and R1 600 respectively (from the monthly car and loan payments section above). She's therefore saving R4 150 - R2 815 = R1 335 on the monthly car repayment and R1 600 - R955 = R645 on the monthly interest payment.

That's R1 980 saving every month! But it can't all be good news — spending R80k all at once isn't free! As a back of the envelope calculation, spending R80k at the start is the same as spending 80k/60=R1 335 every month. So on balance, her savings would be closer to R1 980 - R 1 335 = R645 every month. Not as exciting as R1 980 but nothing to be sneezed at.

Note that these figures are rough (just to get you in the right ballpark). If you'd like a more accurate estimate, see this article on accounting for opportunity costs for a more accurate picture.

What if Lucy went for a new car vs a used car?

Of course the excitement might be heightened with a brand-new-out-the-box car smell, the shiny untouched buttons, and the feeling that Lucy will be the first owner of her new baby but then there’s that little voice of reason in her head.

And that little voice of reason has a few good points. The first one being that a bigger price tag means a bigger monthly payment. A 2020 Polo TSI Comfortline retails for R290 000. Sticking with the original interest rate that Lucy received (12%), the bank quotes her roughly R6 550 per month.

The cost of the car over 60 months is R290k/60 = R4 830 per month.

The interest being charged each month is R6 550 – R4 830 = R1 720.

The second being that new cars mean a higher insurance premium.

The third point (maybe the most important point) is that a car loses value as soon as it leaves the showroom floor. We crunched some numbers — over a 5 year period a brand new car will lose, on average, 35% of its value, a 3 year-old car will lose 29%, and a 5 year old car will lose 25% of its value.

On the flip side, Lucy’s other voice in her head tells her that an older model could result in more maintenance costs — the older the car is/gets, the more attention it’ll need. And if Lucy doesn’t have a warranty and/or service plan in place, she’ll have to cover those costs herself. This is in addition to her budgeting for 1 to 2 incidents per year as mentioned above — which would have to change with an older model. Assuming the model is more than 5 years old, she’d rather have to budget for +/- 2 incidents a year. This would increase her unscheduled maintenance component of cost from R2 340 per month to R3 110 per month.

So now what does Lucy do? Does she throw reason out the window or does she weigh her options to figure out what’s best for her pocket? If she wanted to do the latter, there’s a formula for her to follow.

The basic parts of the formula look a bit like this:

  1. How much is Lucy likely to lose on depreciation?
  2. How much interest and insurance Lucy is going to pay?
  3. Likelihood of unforeseen repairs?

The results will vary depending on the make and model of the specific car you're considering, but roughly speaking:

New car: High A, High B, Low C.

Second hand car: Low A, Low B, High C.

Service plan and warranty vs no service plan and warranty

New cars generally come with service plans and warranties. They are usually for a fixed time or distance and expire when one or both of those limits are reached — most service plans and warranties typically last for 3 years or 100 000 km. There is the option to extend these plans by paying a once-off charge that could range from R5 000 - R10 000, depending on the car.

If Lucy were questioning whether or not she should have a service plan and/or warranty, she should look at the cost component of it. With a service plan, she’s currently budgeting 2% of the car’s value for the year for scheduled maintenance. That’s around R330 per month. Without a service plan, she would double that amount to 4% of the car’s value for the year. That’s around R660 per month (R8 000 per year).

Additionally, selling her car at a later stage becomes a whole lot easier when the buyer knows it has been looked after and serviced by a reputable dealership.

It’s not just the car of YOUR dreams...

Now that you’ve got the true costs of a car waxed, you can hit the web and find a car that's the perfect fit for both you and your wallet! If anything is unclear, feel free to ask us at help@naked.insure and we’ll clarify it. 😊


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