Shopping for a new car is exciting! Whether it’s brand new or a pre-loved beauty, there’s an inherent thrill in the buying process; from choosing the make, to picking the colour and accessories, to driving off the showroom floor after signing on the dotted line.
However, it is easy to get wrapped up in the excitement without truly understanding exactly how much a car costs beyond its price tag. To help you decide whether buying new wheels is right for you, we’ve unpacked two questions the decision comes down to:
Do you have enough money to cover the monthly cost?
After adding up all the expenses that will leave your account in a typical (or unfortunate) month, will you be able to afford the monthly cost of owning a car?
Is it the most efficient use of your money?
Most of us need a means of transport, whether it’s to go to work, drop the kids at school, go shopping or go on holiday. Owning a car is one option, but how does the cost of owning your car stack up against the cost of some of the other transportation options out there?
How to check if you have enough money in the bank
Here are a couple of steps to follow to help you check what the car will cost you each month so that you can compare it with your budget.
Step 1: Choose what car you want to buy
The best place to start is to look at what you will use the new car for. Do you do the school run everyday? Carry golf clubs? Transport samples from your printing business? Or do you just use your car to drive to and from work plus a few social outings on the weekends?
After thinking about your lifestyle and what you’d use your car for, think about what type of car will suit you – luxury, performance, safety, enough seating, boot space, or is it a certain brand that you’re after?
Let’s say that you’re considering a 2020 VW Polo TSI Comfortline (automatic). At the time of writing, this Polo was going for roughly R300,000. You might think, “Yes, I can afford that,'' but what about the other costs that come with owning this car?
Let’s take a closer look at all the monthly expenses that might come with owning this Polo.
Step 2: Check what your monthly car repayment will be
If you’re paying cash for your car, then you don’t need to worry about monthly loan repayments. You can skip to the next section!
Most people will buy a car by borrowing money from a finance house. The amount you then have to pay depends on the interest rate the finance house is willing to offer you as well as the number of months you choose to repay it over. Let’s say that for you, the average repayment amount on a R300,000 loan over 60 months is R6,500 per month. To see exactly how much you’ll be paying each month, have a look at this handy calculator by AutoTrader.
TIP: Remember, that on top of the price of the car, you’ll need to pay for dealer fees, licensing costs, and finance initiation costs. These will then be added to the R300,000 loan, increasing the starting amount of your loan.
Keep in mind that your loan amount will not be reduced by the full R6,500 monthly repayment. On average, over the five years, your monthly payment is split between R5,000 to repay the loan, and the remaining R1,500 is covering the interest on the outstanding amount.
Step 3: How much will fuel cost every month?
Take a look at how much you drive in an average month. Think of driving to work and weekend activities, but also budget for the occasional long distance trip for a remote family wedding or a beach holiday. Let’s say that you travel an average of 1,000km per month.
With the Polo having a fuel consumption of 4.7ℓ/100km and petrol prices getting close to R20 per litre, petrol (rounding up for a bit of parking, car washes, etc) will cost around R1,000 per month.
Step 4: Get insurance quotes from a couple of places
If you finance your car you will be required to take out insurance, however, even if you bought it cash, insuring it is usually a good idea. Insurers will always take a number of things into consideration when giving you a quote, such as the make of the car, where you live, your credit rating, how long you’ve had insurance for, etc. Get quotes from a diverse range of insurance providers to make sure you’re getting the best price available. For more details on this, check out this handy guide.
Let’s say for the purpose of this article that your insurance premium is R750 per month.
TIP: You can change your insurance premium by playing around with your excess. But keep in mind that even though increasing your excess will lower your premium, you will need to pay your excess every time you claim. So don’t choose an excess that is higher than the maximum amount you can comfortably afford to pay out of your pocket if you had to make a claim tomorrow.
Find out more about excesses here.
Step 5: Budget for any nasty surprises
Budget roughly 2% of the car’s value each year for expendables
When you buy a new car, generally, a maintenance plan is included in the cost. It usually includes a warranty on parts or other manufacturing faults, and usually a service plan.
But you’ll still need to budget monthly for expendables like brake pads, windscreen wipers and tyres. To play it safe, you should consider budgeting 2% of the car’s value each year. For the Polo, that’s about R500 per month (roughly R6,000 per year).
If you buy the car without a service plan, you’ll have to budget for that as well. The amount you’ll need to budget is purely dependent on what car you have (and how old it is), but it’s probably between R5,500 and R10,000 per service.
TIP: Ask the dealership you’re going to buy the car from for a rough cost of the regular services you’ll need.
Budget roughly 5% of the car’s value each year for unexpected maintenance
Then there’s also unscheduled maintenance, things like a snapped cambelt, a new clutch or a cooling system, which can easily run into 10s of thousands of rands. It’s recommended that you should budget for at least one incident per year that will roughly cost 5% of the car’s value. For the Polo, one incident is around R1,250 per month.
Again, this estimation is dependent on what car you choose, its age and mileage, which can affect how likely these types of breakdowns are.
Step 6: Add up all the costs
On average, R10,000 is the amount of money you will need in your bank account each month in order to own and drive your car.
What are you actually left with after the five years of paying off your car?
If you choose to buy the Polo, at the end of the five years, you would’ve spent around R600,000 (60 months x R10,000). But that doesn’t mean that you own a car worth R600,000, and it also doesn’t mean that you own a car worth R300,000 (what you bought the car for).
Our actuaries punched some numbers and analysed some data to show us how much a 2020 Polo would be worth in five years. They estimate that a 2020 Polo will be worth around R165,000 in five years due to the fact that your car depreciated in value since you bought it.
What is depreciation?
Depreciation is when the value of an item decreases over time.
There’s something you’ve probably heard from your parents that might as well be an adage saying, “As soon as a car drives off the showroom floor, it starts to lose value.” It sounds like a bit of an exaggeration, but unfortunately, it’s not. This is mainly because of wear and tear, but also because new models are released regularly, meaning the demand for older models goes down, thus reducing the price.
After five years you will then own a vehicle worth R165,000 due to depreciation. That means that it’s lost R135,000 while you’ve been driving it.
This means that on average you are losing R2,250 every month (R135k/60) as the value of your car reduces.
TIP: When you’re thinking of buying a certain car, consider asking the dealer to show you (from the industry databases) how much value your model typically loses every year, and what it’ll be worth at the end of the five years. Different car brands lose value quicker than others, and it’s an important part of evaluating whether it is a good buy.
So what is the true cost of owning a car?
- If you are buying a car worth R300,000 and borrowing the money from the bank, you need approximately R10,000 per month to pay for it each month.
- The true costs that come with owning a car – excluding paying off the loan but including the utility costs of owning a car, plus the loan interest and depreciation – accumulate to R435,000. Meaning that it cost you R435,000 to own and drive the car over that five year period. Thus you paid roughly R238 per day for the use of the car.
- The silver lining is that at the end of the five years you would own a car worth R165,000 (i.e. you have “saved”/“accumulated” wealth in the form of a car that you own).
Should you rather Uber, rent or buy a car?
If you look at the daily cost of renting a Polo it is clear that you get a better deal when you own the car at R238 per day, especially given that that includes unlimited mileage and the cost of your petrol. But is this true of Uber as well?
To see if Ubering is more cost effective, it will need to cost less than the utility costs of owning a car
Let’s use the Polo again. We know that the utility costs of owning a Polo come to R238 per day. Ubering costs roughly R8,00 per km and you’re travelling around 1,000km per month. This means that you’ll spend around R263 per day on Ubering.
Here, the cost of Ubering is higher than the true cost of owning a car. With that said, we assumed a pretty average travel distance. If you travel less than the average we’ve laid out, then the cost of Ubering will become a lot less and could be cheaper than owning a car. Be sure to tailor the calculations above to your specific situation.
Buying a car is a big commitment and to know whether this is the best use of your money is only a question you can answer. What makes it more than a maths problem are all the intangible benefits of having a car. Having a car can be very convenient when you need to pop to shops or go visit a friend on short notice, plus there’s just something so joyous and free about driving a car – it’s something that’s hard to beat once you’ve had a taste of it. Our advice is to do as much research as you can and find a way of getting around that suits you.