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Car Ownership vs Cost of Living

Even after nearly two years of interest rate hikes and tightening their belts, South African consumers are not getting much relief from rising inflation. Petrol prices have increased by more than 47% since February 2021*, and with the ongoing electricity issues, weaker rand and increasing food costs, consumers are needing to find more money each month to pay off the interest on their mortgages, car loans, credit cards and other debt. 

Against this backdrop, one of the expenses that consumers are starting to examine closely is the cost of owning a car. Ernest North, co-founder of digital insurance platform, Naked Insurance, says that costs of car ownership have soared over the past two years, with higher interest rates, rising maintenance and repair costs, fuel price increases, and higher insurance costs. 

Says North: “By some estimates, the average consumer paying off a modest bond, car loan and personal loan needs to find R106,000 extra a year (compared to 2 or 3 years ago) just to keep up their debt repayments. For most people, the costs of their car is their second biggest monthly expense after housing. In these difficult economic times, it’s wise to think carefully about the costs of getting around as part of your financial planning.”

 

Weighing up a car purchase decision  

Buying your first car or replacing your existing one are not decisions to make lightly. North recommends asking yourself some questions before deciding whether to buy a new car: Is this really the best way for me to spend my money? And how will buying a new car affect my monthly expenses and can I afford the costs?  

To answer the first question, you can consider how spending more on a car each month will affect your other financial goals such as saving for a deposit on a home. Think about which sacrifices you might need to make to afford the car, such as spending less on holidays and entertainment. 

To answer the second and third question, there are a range of elements to consider beyond the upfront cost or monthly repayment: 

  • The cost of the car 

The single biggest cost of car ownership is the purchase price. Costs of cars are highly variable, depending on factors such as: 

  • Which brand, model and vehicle class you want to get. Expect to pay a lot more for a high-end luxury brand or a 4X4 than for a basic sedan from a value-for-money brand like VW or Toyota.
  • Whether you buy new or second-hand. You will pay more for a new car than a second-hand car, and it will start losing value as soon as you drive off the dealer’s floor.
  • Which extras you want to get. Adding features like LED matrix headlights, embedded SatNav, or parking assist can inflate the cost of your car. 

It’s worth noting that there is a shortage of secondhand cars, which means that selling prices of used cars are rising faster than that of new cars. According to the recent tracking numbers from TransUnion, new vehicle price increases are below inflation, although this is forecasted to increase in the upcoming months. For our purposes, a new Polo 1.0 TSI retails for around R348,000. 

If you have cash in the bank, you might be able to pay for it upfront. Since few people can afford to pay cash for a car, most will pay for their car through a mixture of a cash deposit and financing from a lender. Your monthly repayment will be determined by the interest rate you pay as well as the number of months over which you repay the loan. Your new Polo will cost you around R7,222 a month on a five-year plan at a typical interest rate of 13% if you pay a 10% deposit. 

  • Fuel costs  

You can work out your approximate petrol bill by looking up fuel consumption for the car you drive and looking at the kilometres you travel each month. If your car’s fuel consumption is just under 20 kilometres per litre and petrol costs close to R23 a litre, it will cost you around R1,150 to travel 1,000 kilometres. Bear in mind that the petrol price is volatile and can go up and down along with the rand and the oil price. 

  • Insurance 

If you’re getting a loan to buy your car, the lender will insist that you get comprehensive car insurance. Even if you are not getting a loan, insurance is essential to protect yourself from loss and liability. Get a few quotes to ensure you’re getting the best possible price. Insurers determine your premium by evaluating how much of a risk you are, so prices vary between different drivers. But let’s assume you’ll pay around R970 per month for your Polo.  

  • Repairs and maintenance 

One of the benefits of buying a new or even a certified used car from an authorised dealer is that it will usually include a service and  maintenance plan that will cover most of the routine things done in your service. However, you’ll still need to budget for expendables like brake pads, windscreen wipers and tyres. This usually averages roughly 2% of the car’s value each year, or about R6,900 for your R348,000 car. If you don’t have a warranty and service plan, you should also plan on spending a minimum of  R7,500-R15,000 per year for services and the unforeseen breakdown of major parts. How much it will cost you will be influenced by the age of the vehicle and how much you drive. 

 

  • Adding it altogether 

When we add the numbers together, we can see that driving a modest car will cost you more than R134,000 a year if you travel just 1,000 kilometres a month. Over the five-year financing period for your car, that will amount to around R670,000 in costs. We estimate that once your car is paid off in five years’ time, it will be worth around R165,000 — so your net costs for owning a car will amount to around R505,000.  

Says North: “Given that most people’s salaries are not keeping up with inflation, it makes sense to be cautious in your budgeting, rather than splashing out on the latest and best model. Leave a bit of a cushion in your budget to provide for petrol price increases, higher insurance costs, and rising maintenance costs.”  

 

Estimated monthly costs for owning and driving a new Polo 1.0 TSI  which retails for around R348,000

Car payment (including monthly interest rate)

R7,222

Fuel & Parking

R1,150

Insurance

R970

Long term maintenance (average per month)

R575

Services & unforeseen maintenance

R1,250

Average total per month

R11,167

Total after 60 months

R 670,020

 *Cost of 93 Petrol Inland for February 2024: R22,92 vs February 2021: R15,50. Source: https://www.sapia.org.za/.