How much should you spend on a car?

Cars – even the cheapest ones – are expensive. A junker that breaks down twice a month will still set you back a few thousand. A nice one with leather seats and a sweet sound system costs more than most people make in a year. For most people, having a car isn’t a choice. It’s required to get to and from work, to go the grocery, to see friends – basically to go almost anywhere in a country where public transport isn’t always reliable.

If you are looking at buying a new car or used car, it’s important to choose a car you can afford to spend money on.

How much do you earn?

The car you are able to afford should be based on your income and how much you are willing and able to spend on a car on a monthly basis. Affordability is the most important factor to consider when buying new or pre owned cars. Please also consider your net and disposable income. The general accepted rule of thumb is that you shouldn’t spend more than 20% of your total income on car payments.

What costs should you consider before buying a car?

Firstly, the purchase price will affect how much you pay every month. The more expensive the car, the more you can expect to spend in monthly instalments. Secondly, your down payment. The more money you pay upfront, the less your monthly instalment will be. You can trade in your current vehicle or sell it privately, which can contribute towards a larger down payment. Then, your monthly insurance cost will depend on the type of car you choose to drive and your driver risk profile. Also, the fuel price and the distances you travel will influence the cost of owning a car.

How can you save money when buying a car?

Buying a car is expensive and can easily become a financial burden. To save money when buying a car, consider paying cash for the car if you can. This means you won’t have to worry about monthly instalments and crippling interest rates. If you can’t pay cash for the car, you’ll have to finance the car. In that case, aim to pay off your car as quickly as possible at the lowest interest rate you are able to obtain.

Down Payment

Try to make your down payment as large as you possibly can, you may even be able to apply for a shorter financing period. No down payment often leads to an ‘upside down loan’ which means that you owe more than what the car is worth. Avoid this situation at all costs.

The amount of money you choose to spend on a car will depend on your personal financial situation and how much you are willing to spend. Remember, buying a car is expensive and you should therefore buy a car you are able to afford and maintain over time without compromising your financial security.