Next to buying a house or having children, buying a car is often seen as one of life’s major milestones. For those taking this step for the first time, the romance of buying a car can often blind people from the financial realities and responsibilities that come along with it.
If you’re like me, you might be prone to just considering just the monthly amortization of the car you have in mind and using that as the sole basis for purchase. For those window shopping or those who are about to purchase a car, let me help you avoid some of the expenses I had overlooked so that ownership does not become a burden, but something you enjoy. For those who have successfully navigated repayment, hopefully this serves as an affirmation of the things you considered during purchase.
Low down payments and low interest rates on longer terms
“There’s no such thing as a free lunch.” Most of us will need to take on some kind of financing to buy our car. For those fortunate enough to be in circumstances that allow for outright purchase, this may not be applicable to you. Low down payments, in some cases zero, don’t come without any strings attached. They’re often offset by higher monthly amortization payments spread over longer terms. If you add the down payment to the total value found on your terms, often 60 months, you will see that you are paying much more than the Standard Retail Price (SRP) of the vehicle you’re looking at.
A lot of it has to do with the cost of money and risk that the banks and/or financing companies attribute to your auto loan. Some may get better interest rates than others but typically one ends up paying a premium for being able to lease a vehicle. When you calculate the total cost of repayment you should ask yourself if the value of being able to use and enjoy a car now is worth the added cost of the loan you’ll end up taking on. Do longer terms really make sense for you or do you have the financial capacity to pay it down sooner? Is sacrificing short-term financial flexibility worth the savings in interest?
Being prepared for maintenance costs
One thing that is usually a part of any vehicle’s sales pitch is the waiver of the first couple of preventive maintenance visits. Whether that be the dealership covering your preventive maintenance costs up until your first 5K to 10K kilometer or the waiver of the costs of the first two visits, the actual price of preventive maintenance becomes clear once that period is up. Keep in mind they also recommend that you check your car in for service every year or after every 10K-km, whichever comes first.
The costs of maintenance are usually proportionate to the kind of car you have purchased. Meaning, if you purchased a larger vehicle, let’s say, an SUV, or a more prestigious model, say, one of the European sedans, you could expect to pay larger fees for parts and services. When you realize that the cost of checking your car in for service could run you the same amount as a monthly payment it could impact your liquidity. You can always ask your dealer for estimates on what these costs are so that you are not caught unprepared. Forecasting these expenses is important so that you can decide if you can afford the one you want versus the one you need.
Car insurance costs
Dealers often tie up with insurance providers for the sales of new vehicles. “Free” comprehensive insurance for the first year is what is often touted around. Well, it isn’t really “free”. What some of the fine print will reveal, depending on which dealer and/or bank you use, is that there is a “lock in” period for these policies. That period can range anywhere between three and five years. In other instances it is really the dealer who has shouldered that cost for the first year. Naturally, they’re able to do that by making a trade-off elsewhere. Typically, banks just want to make sure their asset is insured.
One thing that there is little to no education on is the ability to get your comprehensive insurance elsewhere. When we buy a new car most assume that we have to buy from the provider that is presented to us. As a consumer, where you get insurance from is your choice. Dealers tying up with insurance providers do so to make the process of availing easier for us. But this doesn’t come without additional cost either. Shop around. You’ll often find that the policies bought elsewhere and/or directly, through the many different providers out there, can lead to lower prices. This may not be of immediate consequence, but in the succeeding years where you do need to renew your comprehensive insurance, being locked in may actually cost you more in premiums. What you might find is that policies are costing you on average an additional P5K – P8K more as a result of that first year coming “free.”
Many car buyers focus primarily on price and payment when buying a new car. Take your time to evaluate the options you have available to you so that you make the most of your hard earned money. “Knowing is half the battle.” – G.I. Joe
Greg Aguilar is one of the managers at MoneyMax.ph, the Philippines’ leading comparison website for insurance, credit cards, and loans. You can save money on your car insurance and get the chance to win a brand new Toyota Vios at the same time. For more information, visit https://www.moneymax.ph/learn-more/promotions.