It’s easy to get carried away when you’re shopping for a car. After all, it’s a big purchase, and it’s natural to want to find the best deal possible. However, many people overextend themselves financially when buying a car. In this blog post, we’ll discuss the reasons why people overextend their finances when car shopping and how to understand the true cost of having a car.
Why People Overextend Themselves When Buying A Car
There are many reasons why people overextend themselves financially when buying a car. This can range from ignorance to a high tolerance for risk. Here are a few reasons why.
Many people might think that understanding the fundamentals of financial management is common sense. However, this is not always the case. Many people make mistakes when it comes to their finances without even realising it. This can be especially true when buying a car. As we mentioned earlier, it’s easy to get carried away and spend more than you intended.
The initial purchase is simply the tip of the iceberg. People who overextend themselves on a car buy cars that have higher running costs than cheaper models. This is where financial overextension really takes a turn for the worse for many people.
Having enough money to afford the instalment payments isn’t what the car costs the buyer. When things like wear and tear items need replacing, most buyers get caught out and look for short term lending to cover the running costs. This can be anything from tyres needing replacement to a major service. From there, many people, unfortunately, can’t meet their financial obligations, and their credit scores slowly slide down to bad credit ratings. When this happens, many people look for more short term loans for bad credit, and the hole gets deeper and deeper.
This is where ignorance takes its toll. The affordability of a vehicle should be considered based on a wider financial scope. Yes, it starts with the purchase price, but you shouldn’t forget about interest, maintenance and running costs.
It can be difficult to say no when your friends or family are pressuring you to buy a car you can’t afford. They might tell you that you’re being too cautious or that you’re overreacting. Unfortunately, this type of peer pressure often leads people to make bad financial decisions. In many cases, the peer pressure is not as direct as it seems.
For example, you might be tempted to buy a more expensive car than you can afford because your friends are driving nicer cars. Or maybe you feel like you need to keep up with the Joneses and buy an extravagant car that will show everyone how successful you are. However, in most cases, this is simply not worth it. You’re better off sticking to a budget that works for you and your family. Also, driving an expensive car doesn’t mean that you’re trying to impress someone. Of course, driving a nice car is a reward from yourself, but it should not overextend you financially.
Tolerance For Risk
Some people have a higher tolerance for risk regarding their finances. For example, they might think they can handle taking on more debt to purchase a car. Unfortunately, this type of thinking often leads to financial disaster. These people might make the monthly payments at first, but eventually, they will fall behind and end up in even more debt.
To avoid this, you need to be realistic about your financial situation. Don’t take on more debt than you can handle. Remember that the car is not worth going into significant debt for. There are many other things that you can do with your money that will help improve your life, such as saving for a down payment on a house or investing in stocks and shares.
People with a high tolerance for risk often make financial decisions with the idea of what their finances can be tomorrow. These people are also known as dreamers; they will buy an expensive car today based on their belief that their biggest success is right around the corner. We often hear many stories of this happening, of innovators who believe and become successful. However, air on the side of caution because the tears of the majority really write the story.
There are various other reasons people overextend their finances when buying a car. But, by keeping the three points listed above in mind, you can avoid making the same mistakes and keep your finances on track.
How To Calculate Vehicle Affordability
Set Up Your Budget
The first step in calculating vehicle affordability is setting up a budget. You need to list all of your regular income and expenses, including mortgage payments, credit card bills, grocery costs etc. This will give you a good idea of how much money you have leftover each month after paying for your necessities.
The key is to understand how your budget changes from month to month. There are two overarching expense types within a budget: fixed costs and variable costs. Your fixed costs are the same each month, such as your mortgage or rent payment. On the other hand, your variable costs can change from month to month, such as groceries or entertainment expenses.
You should also consider any one-time expenses that might occur in the near future. For example, if you plan to do home renovations in the next six months, you should factor that into your calculations.
The best way to understand your financial behaviour is by tracking your spending habits. If you know where your money is going, you can accurately budget for adding a vehicle and its associated costs into your budget.
Budget For The Actual Cost
A good way to work out the actual cost of a vehicle is to start with the obvious and then work your way down to the finer details. Their vehicle expenses will fall under their travel and transport budget section for most people.
The areas that need to be considered are:
This is the obvious one. You need to know how much you’re willing to spend on a car. The amount financed is the amount that the bank will finance for you. It’s important to remember that this number includes the purchase price of the car and interest, tax, and other associated fees.
The payment term is the period of time in which you will be paying off your vehicle. A longer loan term typically means a lower monthly payment but more interest paid over the life of the loan. Some people opt to have an extended loan term to afford their dream car, while others prefer shorter terms because they want to pay off their car faster.
The interest rate is the percentage of your loan amount that you will be charged for borrowing money. This value varies based on factors such as your credit score, down payment and the dealer’s policies. If you have good credit, then chances are you’ll get a better interest rate than someone with bad or no credit.
Depreciation is the natural decrease in a vehicle’s value as it ages. The depreciation rate varies depending on make and model but typically accelerates in the first few years. It’s important to keep this in mind when budgeting for a car, as you’ll likely lose money on the sale if you decide to trade in or sell after a few years.
Many dealerships require a deposit when you purchase a car, which can be anything from £100 -£2000.
The cost of servicing the car. A car typically needs to be serviced every 15 000 km or once a year, whichever comes first. Most new cars include a service and maintenance plan. For example, a 90 000km/5 Year service and maintenance plan. This cost for these parts and services is often included in a new vehicle’s purchase price. However, if you buy a second-hand car, you need to understand that these service plans and warranties might not be valid anymore, meaning you’ll have to pay for them. It is advised to get quotes from a service centre on the type of vehicle to determine average service costs.
The cost of car insurance can vary greatly depending on your age, driving history and the make and model of the vehicle. Try to get a car insurance quote on the car you’re considering.
If you live in a city, parking can be expensive. You need to take this into account when budgeting for a car.
The cost of petrol is also something to consider, especially if you’re travelling long distances every day.
Tolls and Registration Fees
Tolls can add up very quickly if you drive on toll roads often, so it’s best to factor that into your budget as well.
All of these costs should be added together to give you a true indication of what you’ll be spending on travel and transport. If this number falls within your budget, then you’re set to go ahead. As a rule of thumb, your total annual spend on travel and transport should not exceed 15% of your income. Consider looking for alternatives to offset the financial risk if you’re coming in high.