How Much Car Can I Afford?

When buying a car, everyone’s dream is to get behind the wheel of a shiny new ride. However, for most people, owning a car isn’t simply a matter of desire. It is a severe financial commitment that requires careful thought and consideration.

Key Takeaways

  • Understanding your car affordability: Before you begin shopping for a car or considering a loan, it’s crucial to assess your financial status, including your income, expenses, and savings. This assessment will guide your decisions and help you avoid unnecessary financial stress.
  • Understanding auto loans: Interest rates, loan tenure, and credit score significantly influence auto loans. Understanding these factors will better equip you for the loan application process and help you secure favourable loan terms.
  • Calculating car affordability: Consider not only the cost of the vehicle but also associated costs like insurance, maintenance, and operational costs. Using auto loan calculators can simplify this process and give you a more accurate estimation.
  • Increasing car affordability: Improve your credit score, consider a larger down payment, and shop for the best auto loan deals. These strategies can help you afford a better car or reduce monthly payments.

The Fundamentals of Auto Loans

Defining Auto Loans

An auto loan, simply put, is a personal loan used specifically to purchase a vehicle. In South Africa, a prospective buyer will approach a bank or a finance company to borrow a specified amount to buy a car. The vehicle typically serves as collateral for the loan. This arrangement allows you to immediately become the car’s legal owner, with the understanding that you’re obliged to repay the borrowed amount, plus interest, over a set period.

Most auto loans in South Africa have repayment periods ranging from 12 to 72 months, although longer terms are becoming increasingly common. The frequency of repayments is usually monthly, and failing to keep up with these repayments could lead to serious consequences, such as the repossession of the vehicle.

Understanding Interest Rates and Loan Tenure

Interest rates and loan tenure are two critical components of any auto loan, and understanding their implications is key to determining the cost of your loan. The interest rate, often expressed as an annual percentage, represents the cost of borrowing. In South Africa, these rates can be fixed or linked to the prime rate, meaning they fluctuate based on the Reserve Bank’s policy decisions.

On the other hand, the loan tenure, or term, represents the duration over which you’ll repay the loan. A longer tenure means lower monthly instalments since the cost of the car is spread out over a greater number of months. However, it’s worth noting that this also leads to a higher total repayment amount, as interest is accumulated over a longer period.

The Impact of Credit Scores on Auto Loans

Your credit score, a measure of your creditworthiness based on your past borrowing and repayment history, is pivotal in the auto loan application process. A higher credit score can improve your chances of loan approval and secure more favourable interest rates.

Credit bureaus calculate South Africa’s credit scores, ranging from 330 to 830. Lenders consider a score above 580 as ‘good’, while a score above 720 is deemed ‘excellent’. If you have a lower credit score, don’t despair. While securing a loan may be more challenging, several lenders cater to consumers with less-than-stellar credit histories. However, the interest rates may be higher to offset the increased risk.

Steps to Calculate Car Affordability

Identifying Your Financial Status: Income, Expenses, and Savings

To calculate car affordability, the first step is understanding your financial status, encompassing your income, expenses, and savings. Your income establishes your capacity to repay monthly loans, while your expenses and savings highlight your financial responsibilities and cushion.

Income includes your salary and any additional earnings, like rental income or freelance work. Your expenses, on the other hand, should consist of all recurring costs like rent or mortgage payments, groceries, utility bills, and any existing debt repayments.

Once you clearly understand your income and expenses, subtract your total expenses from your total income. You could allocate the amount left towards a car loan repayment. Remember to leave room for savings and unexpected expenses. Savings are a wise financial practice and provide a buffer during unforeseen costs or emergencies.

Establishing a Realistic Budget for Car Ownership

You can establish a realistic car ownership budget with a clear understanding of your financial situation. This budget should cover the monthly car loan repayments and account for ongoing vehicle-related expenses, such as fuel, insurance, maintenance, and potential interest rate increases.

A common rule of thumb is to allocate no more than 20% of your monthly income towards car-related expenses. This percentage includes car loan repayment as well as other car-related costs. Remember, owning a car involves more than just the purchase price. Being realistic and prudent at this stage can save you from financial strain.

Using Auto Loan Calculators

Auto loan calculators are invaluable tools in determining car affordability. These online tools allow you to input the car price, down payment amount, interest rate, and loan term to calculate your potential monthly instalment. You can adjust these variables to see how the changes in the down payment or loan term affect the monthly payment and total repayment amount.

An auto loan calculator can visually represent how different loan structures impact your monthly budget, making it easier to understand what car price range is affordable. Keep in mind, though, that the results from these calculators are estimates, and your actual loan terms may vary based on the lender’s policies and your credit score.

Factors Influencing Car Affordability

The Price of the Car: New vs. Used

The price of the car you choose to buy directly influences your car loan amount and, consequently, the affordability of the vehicle. In South Africa, you can purchase either a new or used car, each with its own set of financial implications.

New cars often come with higher price tags but usually include warranties and maintenance plans, which can offset some ownership costs. Moreover, new cars can often qualify for lower interest rates due to lower perceived risk for lenders.

On the other hand, used cars tend to be more affordable upfront, though they may carry higher interest rates and lack the additional warranties and service plans offered with new cars. Additionally, used vehicles may have higher maintenance costs, depending on their age and condition.

Balancing these factors against your financial status and car ownership can help you make an informed decision about the type of car to purchase.

Auto Insurance Costs in South Africa

Auto insurance is another significant factor to consider when calculating car affordability. Although car insurance is not legally required in South Africa, it’s a highly recommended safeguard against potential financial losses due to accidents, theft, or damage.

The cost of car insurance can vary based on numerous factors, such as the car’s make and model, the driver’s age and driving history, and the level of coverage chosen. Comprehensive insurance, which covers damage to your vehicle and third-party damage, is generally the most expensive but also the most protective.

Adding the monthly insurance premium to your car budget can help ensure you’re fully prepared for the total cost of car ownership.

Maintenance and Operational Costs

Lastly, maintenance and operational costs are critical aspects of car affordability. These include fuel costs, regular maintenance and servicing, as well as potential repair costs. While new cars typically have lower maintenance costs initially due to warranties and service plans, all vehicles will incur operational costs such as fuel, tyre replacements, and annual licence renewals.

Electric or hybrid vehicles may have higher upfront costs but lower operational costs due to lower fuel consumption and fewer mechanical parts requiring maintenance. Considering these ongoing costs when choosing a car can significantly impact your long-term affordability.

How to Increase Your Car Affordability

Improving Your Credit Score

As we’ve already touched on, a healthy credit score can lead to better auto loan terms, including lower interest rates, directly affecting your car’s affordability. So, how can you improve your credit score? The first step is always to understand your current credit status. In South Africa, you’re legally entitled to one free credit report per year from each major credit bureau.

Once you have this report, identify any areas of concern, such as late payments or defaults, and make a plan to rectify these issues. This might involve setting up automatic payments for bills to ensure they’re paid on time, reducing your credit card debt, or settling any defaulted loans. Patience and consistency are key here, as credit scores take time to improve.

Considerations for a Larger Down Payment

Making a larger down payment on your car purchase reduces the amount you need to borrow, making your loan more affordable. A larger down payment might also mean lower interest rates and a shorter loan term, as you pose less risk to the lender.

This strategy does require you to have a lump sum of money available upfront, which can be challenging for many people. However, if you can afford to do so, this can effectively reduce your monthly car loan repayment, making car ownership more affordable in the long run.

The Value of Shopping Around for Auto Loans

Just as you would shop around for the best price for a car, it’s worth taking the time to compare auto loan offers from different lenders. The interest rates, loan terms, and fees can vary significantly from one lender to another, and finding the best deal for your circumstances can substantially impact your monthly repayments.

Don’t limit your search to just banks; consider credit unions and online lenders as well. Many online tools allow you to compare loan offers from different lenders, simplifying this process. Remember, every percentage point reduction in interest can lead to significant savings over the life of your loan.

» Find out more: on how your car’s value shrinks yearly.

About Arcadia Finance

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Common Pitfalls in Auto Loans and How to Avoid Them

Overlooking the Total Cost of Ownership

One common misstep in the auto loan process is focusing too heavily on the monthly loan repayment and overlooking the total cost of car ownership. This is not limited to the car’s sticker price but encompasses other costs such as insurance, fuel, maintenance, and even depreciation.

To avoid this pitfall, factor in all these elements when determining your car’s affordability. Calculate the annual cost of these factors and add this to your car budget to obtain a realistic picture of what you can genuinely afford.

Falling for Too-Good-to-Be-True Deals

In the world of auto loans, as in life, if a deal seems too good to be true, it likely is. Some lenders may offer extremely low-interest rates or unusually long loan terms, making the car seem more affordable. However, these deals can often mask hidden costs or unfavourable conditions.

To safeguard against this, always thoroughly read and understand your loan agreement before signing. Don’t hesitate to ask questions or seek advice if there’s anything you don’t understand. Remember, a slightly higher interest rate from a trustworthy lender can be better than a lower rate with hidden conditions.

Misunderstanding the Loan Terms

A final common mistake is misunderstanding the loan terms, particularly the interest rate and loan period. It’s essential to understand how these two factors work together. A longer loan period might reduce your monthly repayments, but it often results in paying more interest over time.

Avoid this by taking the time to understand exactly how much you’ll be paying over the life of the loan, not just each month. Use online auto loan calculators to compare different loan terms and choose the one that best suits your financial capacity.


Simply put, calculating car affordability is not just about determining how much you can afford. It’s about making an informed decision that aligns with your financial status and long-term goals. By following this guide, you are well on your way to making a sound and savvy car purchase.


What is the average interest rate for auto loans in South Africa?

The average interest rate for auto loans in South Africa can vary widely depending on the lender, your credit score, and the loan term. Currently, rates can range between 10% to 15%, but it’s crucial to check the latest rates from various lenders for the most accurate information.

Can I afford a car if I have a poor credit score?

Yes, it is possible to afford a car with a poor credit score, but it may be more challenging. Banks may still offer loans, but these often come with higher interest rates. However, improving your credit score before applying for a loan can increase your chances of getting approved and securing better loan terms.

How much should I spend on a car if I earn XXX Rand monthly?

Generally, the total cost of car ownership, including your loan payment, insurance, and maintenance, should not exceed 15% to 20% of your take-home pay. However, it’s vital to consider your other financial obligations and goals when deciding how much to spend.

Is it better to take a short-term loan with higher payments or a long-term loan with lower payments?

The answer to this depends on your financial situation. A short-term loan means you’ll pay off your car sooner and pay less in interest overall. However, the monthly payments will be higher. Long-term loans have lower monthly payments, but you’ll pay more interest over time. The best choice is the one that fits comfortably within your budget and aligns with your financial goals.

What are the options if I can’t afford the car I want?

If the car you want is outside your budget, consider purchasing a used version of that model, waiting and saving for a larger down payment, or looking at other models that offer similar features at a lower cost. It’s crucial to avoid stretching beyond your means simply to drive a particular car.

How much do you need?
*Representative example: Estimated repayments of a loan of R30,000 over 36 months at a maximum interest rate including fees of 27,5% APR would be R1,232.82 per month. Arcadia Finance is an online loan broker and not a lender. Our service is free, and we work with NCR licensed lenders in South Africa. Interest rates charged by lenders can start as low as 20% APR, including an initiation and service fee determined by the lender. The interest rate offered depends on the applicants' credit score and other factors at the lender's discretion.

Loan amount R100 - R250,000. Repayment terms can range from 3 - 72 months. Minimum APR is 5% and maximum APR is 60%.