Money Talk with Nimi: Brand New or “Tokunboh”

Buying your first car is a huge financial commitment and for most young people this is the first major purchase they will make. There are three main things to consider – choosing the car, determining how much you can afford, and paying for the car.

Which car should you buy? What type of car do you really need? Pick up brochures and magazines and look at the different makes and models and narrow down your choices to a few cars within your budget. Talk to friends, family and colleagues who have had some experience with the same models. Is the car easy to service? Some cars retain their value longer than others. Does it have a good resale value? These are all important considerations.

How much can you afford to spend? Vehicle financing is offered by several banks and financial institutions; this gives you some scope to negotiate the best financing terms. Set a price range that fits your budget and your own particular situation and resolve to stay within it. Shop around for a few quotes; compare the terms, interest rates, fees and penalty charges imposed by various lenders. Don’t feel obliged to close a deal immediately. The difference could be significant.

We all love that new car smell but don’t forget the running costs. In addition to the initial purchase you must consider the costs of registration, service and maintenance, parking, fuel, insurance and monthly payments if you borrow or lease. It is tempting particularly for young people to want to go for the bigger flashier car as against the smaller, more economical one. You just end up spending much more on fuel and maintenance costs, which can become a burden.

Be careful of sales “gimmicks.” In trying to take advantage of incentives and promotions offered by some dealers and lenders, you might end up paying much more in the end. Different scenarios may be presented, ranging from no down payment or a period of no interest payments. Calculate your payments in advance, so you know exactly how much money you will part with over the lease term.

The new versus “tokunboh” or second hand car decision is not just a matter of personal preference but is about what you can afford. New cars usually come with a warranty that covers some expenses for a period, but they are much more expensive. A car is not an investment; through the process of depreciation, the value of your new car begins to decline from the moment you drive it out of the show room.

Second hand cars do not lose as much value but you need to do some extra homework to avoid buying a substandard car. Have the car checked by a qualified mechanic, especially if you really don’t know anything about cars. This will prevent you from buying a car that will need a lot of repair work or may have been in a serious accident that isn’t immediately apparent.

There are several options for how you pay for your car. Of course if you can afford it, and have excess funds available, pay for your car with cash; it saves you the interest costs. Leasing has become a popular option as cars are expensive and only a few people have the means to part with large amounts of cash all at once without borrowing or leasing.

Leasing is a bit like renting a car; the most important factors with a car lease are the down payment, the monthly payments, and the length of the lease. A down payment of 10% to 20% is usually required but you can choose to make a larger down payment to lower your monthly payments. Whilst leasing helps you to free up cash in the short term, remember that by the time you have finished paying off your car, you will have paid much more than it was initially worth due to the interest combined with your payments.

Read the small print. Lease agreements are usually long and tedious to go through but you need to read the agreement carefully, and make sure you understand the terms and conditions before you sign any document. You don’t want any surprises down the line. With all its benefits, car leasing requires much discipline and commitment. Look carefully at your own particular situation to determine if you really are a leasing candidate.

If you have a history of making your payments on time and don’t keep excessive debt, you should be a good candidate for a lease. On the other hand if you have had a chequered credit history with late interest payments and returned cheques reflecting on your account, you may find it difficult to qualify. Try to avoid defaulting on your loan as missing even one payment could damage your credit history. Set up a direct debit from your account so that payments are regular and on time.

Leasing makes it possible for you to drive a car that you really cannot afford so when you visit the car show room try not to be tempted. If you are looking to impress your friends, remember how embarrassing it would be if you fall back on your payments and the car is re-possessed at the shopping mall in full view of everyone. The lessor, with the spare key retained in their custody, can drive off with their property if you ignore the default notice.

View your car as a tool to get you from “a” to “b” and not as a status symbol. Try to get the best value for your money. Remember, your first car doesn’t have to be your dream car. Whatever your choice is, enjoy it, have fun and drive safely!
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Nimi Akinkugbe has extensive experience in private banking and wealth management. She is passionate about encouraging financial independence and offers frank, practical insights to create a greater awareness and understanding of personal finance and wealth management issues. She is married with 3 children.Find out more via www.nimiakinkugbe.com