The road to financial ruin is paved with expensive cars. Over the years, buying a car has become more than a purchase of convenient transportation. It’s a status symbol supposedly showcasing your worth. In reality, though, spending too much money on cars you can’t really afford hinders your finances. Every shilling you overspend on cars is money that could have been invested to build real wealth. Let’s take a look at three signs you spend too much money to get from point A to point B.
Stuck in loan payments
“You could be driving a new shiny car for only 72 easy monthly payments!” That may sound like a fair infomercial given to you by a sleazy salesman. But it’s more common than you think. Recent research reveals more consumers than ever are financing vehicles with terms between 61 and 72 months.
Approximately 44% of new-car buyers and 41% of used-car buyers take out 61- to 72-month loans. Making matters worse, 29% of buyers are using 73- to 84-month loans to buy new cars, while 16.4% are using those extended terms to buy used cars.
If you need a loan lasting 5, 6, or 7 years in order to pay for a car, you’re spending too much money on your ride. Low interest rates aren’t a valid excuse in many cases. The average interest rate for new and used vehicles is about 4.6% and 8.8%, respectively.
How much can you afford for a car? One general guideline is the 20/4/10 rule, meaning you should put down at least 20%, finance it for no longer than four years, and not let the total monthly expense (including principal, interest, and insurance) exceed 10% of your gross income. If you skip payments altogether and pay cash for used cars costing Ksh 1,500,000, your finances will be in even better shape.
Fueled with debt
Nothing artificially supercharges household budgets like debt. Borrowing from the future is a popular way to pay for things nowadays. However, if you can’t afford your regular living expenses and must rely on credit cards to fill in budget gaps, you should avoid expensive vehicles.
The initial price tag is only the beginning when it comes to car expenses. A recent analysis finds the average driver spends Ksh200,000 on fuel, insurance, and repairs each year. Due to driving 68% more than the national average, drivers in Nairobi spend an average of Ksh 150,000 per year on fuel alone. While it’s true gas prices are significantly lower than they were a couple years ago, that doesn’t mean they’ll stay low forever. And certainly shouldn’t be an excuse to buy an oversized SUV that requires a ladder to climb into.
If you don’t have any money set aside for life’s speed bumps because you’d rather impress strangers on the road, you’re spending too much money on cars. The average monthly new-car payment is Ksh 50,000. When you combine that monthly payment with the average spent on fuel, insurance, and repairs, you could be spending about Ksh 800,000 per year on transportation. It’s no wonder why many driving Kenyan can’t afford financial emergencies without using debt.
A research shows that only 30%% of Kenyans have enough money in their savings accounts to pay for an unexpected expense, such as a Ksh 50,000 car repair or a Ksh 100,000 emergency. If a financial emergency arises, 8%% supposedly plan to cover the bill by reducing spending elsewhere, 12% say they will borrow money from family and friends, and 10% expect credit cards to fill the hole. This potentially leads to even bigger problems down the road.