Should I Pay Cash for a Car?

Just as each of us is unique, so are our finances. This makes it impossible to give a uniform answer to the question: “Is it better to pay cash when buying a vehicle or not?”

High Cost of Credit

Borrowing money for a car can be one of the most expensive household items for South Africans owning vehicles. The South African Reserve Bank (SARB) tracks the average interest rate charged on instalment sale agreements (the loan agreement used to buy assets such as cars) and reported an average of 11.38% in March 2019.

Recent research shows that the average used car loan is around R234,000. If you took out a vehicle loan for this amount and have a good credit history, you could assume that you may repay the loan at around 12% per annum as follows over three, four, and five years (based on a R234,000 vehicle): 

Number of Years	Number of Months	Monthly  Instalment	Monthly Admin Fees	Once Off Initiation Fees	Total Interest	Total Repaid
3 Years	36 Months	R7881.25	R69	R1,207.50	R46,033.67	R283,725.17
4 Years	48 Months	R6262.92	R69	R1,207.50	R62,100.45	R300,619.95
5 Years	60 Months	R5301.05	R69	R1,207.50	R78,716.16	R318,063.66

When you investigate vehicle finance options, for example, using various online bank calculators, it’s easy to see that it is cheaper to buy a car for cash than using a loan. However, do not assume it is always better to buy a car for cash even if you have the lump sum available. Consider the following:

• How much savings should you keep for emergencies, such as possible unemployment or unforeseen medical costs.
• How much sufficient cash flow you require, for example, if you have your own business.
• Your credit history and consequently how much you will be charged in interest on a loan.
• Employment-related factors, such as whether you are self-employed, salaried, have a car allowance or are writing off vehicle loan costs for tax purposes.
• The necessity of having a car for work.

Professional Financial Advice

These complex matters pertaining to your personal finances as well as your taxes. Before buying any car, get advice from a specialist accredited in terms of the Financial Advisory and Intermediary Services Act (FAIS); an act protecting consumers by regulating financial service providers (FSPs). These professionals include your:

• Personal Banker – Skilled in helping clients manage their money by balancing risk and return, and who is knowledgeable about savings, investment and credit products.  
• Financial Advisor – A professional who provides financial guidance to clients based on their needs and goals especially related to investments, retirement, insurance, home loans, estate planning and taxes.
• Tax Consultant – A financial expert with advanced training and knowledge of tax law, who advises clients about their tax forms and remaining compliant regarding tax matters, including vehicle purchases.

After finishing your financial research, the best part begins as you choose your new car, confident that you can afford it. Start by visiting your nearest Auto Pedigree dealership who can assist you in selecting the car that best suits your needs and pocket.

Disclaimer: This information is for educational, or entertainment purposes only. We do not make any warranties about the completeness, reliability, and accuracy of this information.