As part of the Fincheck Vehicle Finance education series, we're taking a moment to give people some perspective on the small things they end up paying big for. If you think the recent increases in fuel prices result in your most expensive tank of fuel ever, you're mistaken.
Your most expensive tank of fuel is actually the one you got when you drove your car off the dealership floor. Don't believe us? Stick with us as we get into it.
We always hear people ranting about the latest increases in fuel prices. And, although understandable, we've noticed the biggest outcry usually comes from people who don't manage their personal finances well. Sure, no car driver is stoked about increases in fuel prices. It's the price of two decent coffees more on the average tank!
But, as we were doing some research for educational content to complement the recent launch of our simple vehicle finance online application process, we found an interesting little thing...
The same people who cry most about fuel increases are still paying for their most expensive tank of fuel ever!
This can sound like a big statement considering we're well on our way to R16-R17 fuel prices. Still, these increases are not what is costing you the most! Like we said, your most expensive tank of fuel is actually the one you got when you drove your car off the dealership floor.
Why? Because you are still paying for it! With interest. Every single month, as long as your finance term runs. And don't forget, you drove that tank of fuel out in the first month of owning the car. Probably the first week.
How on earth are you still paying for your first month of fuel?
It's got a little something to do with what is known as "on the road fees". When you buy your car, "on the road fees" are usually loaded on to your vehicle finance agreement. Then it is financed along with the cost of the vehicle over the agreed upon term with a certain interest rate.
Surprise, surprise - that tank of fuel you drive away with is actually included in your "on the road fees". No, the dealership wasn't just being nice.
There are some other things to be said about on the road fees and the NCR violations attached to them which we can't get into now, but our friends over at Hippo has written this great post about it. What we will get into though, is what we found out about "on the road fees" and how you can do a smarter application next time you apply for vehicle finance.
Your "on the road fees" are typically everything necessary to get you, well, on the road. It includes some pretty valid stuff:
- initiation fees
- extended warranty on occasion
- delivery of the vehicle
- delivery fuel of the vehicle
- licence and registration fees
Now, some companies have been in the cross-fire because of loading these fees with a bunch of unnecessary extras onto vehicle finance agreements without informing the buyer of everything that is included.
Fortunately, we got hold of a local dealer to confirm some facts and asked for the breakdown of their on the road fees that ranged between R4,000-R5,000. It included the following things:
- licence and registration fees
- fuel needed for necessary tests
- admin fees
They were cutting it close when it came to including unnecessary fees and didn't offer a breakdown of these fees unless you asked for it. Turns out, knowing this and making the responsible decision would be entirely up to the buyer. Many buyers don't realise these fees don't need to be included in the vehicle finance agreement!
So how does this become your most expensive tank of fuel ever?
It's not really about the R300 or R400 tank of fuel they put in the car. It's about the cost being part of a bigger package of costs being financed along with the vehicle cost.
Most probably, because of two reasons.
- People buy ignorantly and just sign on the dotted line
- People buy above their means and finance everything they can
People buy ignorantly and just sign on the dotted line
People don't take a second look at their vehicle finance agreement and the breakdown of the costs included. They are either ignorant or just don't care. In many cases, people are nervous and don't like asking questions because they don't want the dealer to feel they don't trust them. Or, they simply feel awkward in these type of situations and want to get out!
People buy above their means and finance everything they can
This is one of the most common reasons why people suffer from their personal finances instead of gaining from it. They tend to buy things they cannot afford.
It's the same when someone buys a car. They have a certain budget in mind but slowly but surely get sucked into a sales pitch when they talk to a sales agent. The conversation usually ends in a vehicle finance agreement that puts most people in a debt cycle they will struggle to ever exit in their life.
This type of agreement typically includes things like balloon payments and ultra long finance terms that result in huge interest amounts over the term of the agreement. See how real this debt cycle is by reading this article that explores the millions your car will cost you in the long run.
The point is, a person goes to a dealer to buy a car and they can afford the monthly finance. What they cannot afford though, is the once-off costs associated with buying that car. This includes things like "on the road fees" and warranty insurance.
These two things alone could put you back about R15,000. To get an idea of what this is costing you when you finance it, let's look at the opportunity cost you are paying and what this could have been in future investment gains.
Let's look at an illustrative example to see what you are really paying due to "on the road fees"
Let's say you buy your car and you ignorantly (or for some other reason) finance the "on the road fees" of R5,000. We'll ignore the warranty insurance of at least R10,000 in this example.
If you financed your "on the road fees" of R5,000 on a car loan of R200,000 you would end financing R205,000. This would cost you a marginal extra of about R100 per month (using an average term and interest rate).
Now, you could easily dismiss that R100 because of the two reasons mentioned above forcing you to finance the R5,000. And come on, it's only R100 more a month!
But if we take a hypothetical monthly investment contribution consisting of that R100 you would have paid per month, and save it for the duration of the vehicle finance agreement, you could have almost R8,000 in your fund at the end of the term. See the simplified screenshot below.
How is this possible?
Instead of paying R100 more per month on your car, you would have paid the R100 as a contribution into a basic fund. This is simplifying quite a few things when it comes to investing, but we wanted to show you the simplified opportunity cost of paying that R100 instead of investing it. All because you financed the "on the road fees" instead of paying it upfront.
Of course, we do understand you still have to pay that money when you buy the car.
The point is, there are serious opportunity costs to unnecessarily financing even marginal amounts. The profit you would have left after subtracting the cost of your "on the road fees" from your hypothetical investment can become the future education fund of your child if it is invested soon enough (to benefit from compound interest).
What about the legal factors?
Apart from the opportunity cost we explored in the example above, there are also legal implications involved when your "on the road fees" are financed as part of the purchase price of the vehicle.
Fortunately, the NCR won't be taking out their beef on you, as can be seen with the recent claims brought against Volkswagen Financial Services.
But for peace of mind's sake, we're sure you would like to step into a finance agreement where you are following the regulations put in place by the National Credit Regulator.
Is it really the most expensive tank of fuel you ever bought?
There are many ways to look at it. And it's probably a little bit of an apple compared to a pear situation. But in the end, it's about a personal finance mindset.
For most people, paying more for fuel today based on petrol or diesel hikes means their fuel is more expensive today than a few years ago.
But if you get that it's the little foxes that spoil the vines, there is a ton of value you can get from marginal gains when it comes to your personal finances. These gains can easily become the difference in being financially independent now versus in 5 years.
If you are looking to finance a car, we want to encourage you to use our simple online application process and start by putting R5,000 in savings first so you can drive your new purchase guilt-free.