Is financing a brand-new car a smart move?

Published on 2nd February, 2023 at 10:14 am

It’s tempting to commit to a financing agreement for a new car fresh off the showroom floor, but with it comes the higher repayment costs, plus additional expenses like steeper insurance premiums and any costs not covered by your service plan. We asked Sanlam senior financial planner Nicki Blignaut of 2one2 BlueStar for her view of the pros and cons of financing shiny new wheels.

Reading time: 3 minutes

In this article you’ll learn:

• The advantages and disadvantages of financing a brand-new car.
• Why it can be beneficial to buy a used car or demo model.
• How the vehicle value calculator and Sanlam Credit Solutions help you live with financial confidence.

The benefits of financing a brand-new car

You get the latest safety and comfort technology

Manufacturers are constantly optimising their offering and churning out new models to keep up with the needs of the discerning driver… and to stay ahead of competitors. With a new car, you’ll pay a handsome sum, but be sure that the car’s specs are in line with the industry standard – giving you peace of mind especially on the safety front.

New wheels = no hidden fender benders

When purchasing from a reputable second-hand sales dealership, you can almost be guaranteed to receive a full history of the vehicle, plus have the peace of mind that a chop shop didn’t feature anywhere in the vehicle’s past life. But sadly this is not the case with all dealerships, which means purchasing a brand-new car gives you that added confidence your car has all original parts, and is not a pieced-together composite of a written-off vehicle.

If you’re responsible, it could improve your credit score

This comes with a caveat: you could finance a used car too, and if you honour the credit agreement responsibly, you would still be helping improve your credit score.

Where do you and your credit score stand? Find out, for free, with Sanlam Credit Solutions. Conveniently check your credit score, credit history and recommendations all on one dashboard.

Downsides to financing a brand-new car

From an asset value point of view, a vehicle begins to depreciate within seconds of being driven. “The moment you drive off the showroom floor, you’ve already lost 20% of the vehicles value,” Blignaut explains. If you’ve got your eye on a new model on the market, see about getting a well-priced demo model, she suggests. “It makes much more financial sense.”

Insurance headaches

If you insure a new model for its market value, you won’t be paid out for it in full if you have an accident. “If, for example, you’ve purchased a new car for R200 000, you may only be paid out R150 000 for it if it gets written off,” explains Blignaut. “Where are you going to find the other R50 000 to pay the difference?” Yes – you can take out more insurance that would potentially cover this shortfall. The outcome? Not only is your new car now costing you more, but your insurance is being revved up as a result of your purchase.

Balloon payments a no-no

Many people tend to take out a balloon payment as part of their financing agreement in order to be able to ‘afford’ a car that they actually can’t afford, says Blignaut, but really, this is not advisable, as it makes the car even more expensive at the end of the day.

Have you budgeted for servicing?

Brand-new cars tend to come with expensive service plans. It makes much more sense, says Blignaut, to create a separate bank account where you save R1 000 a month to service it when necessary. “You’ll probably land up paying half of what it would cost to service your car under a service plan,” she says.

Watch out for interest rate hikes

Just because you can afford that shiny new car now, it doesn’t mean you will be able to afford it in a few years when the interest rates go up. “Bear this in mind when you make your purchase,” warns Blignaut. “Rather spend a little bit less than you can afford, so that if the interest rates do go through the roof, your car is still within budget.”

Thought interest rate hikes were all bad news? Think again. Here’s how you can take advantage of them.

Use this vehicle value calculator to help you pay the right price for your vehicle insurance.