Vehicle finance: What to consider when buying a car

With interest rates being at an all-time low, many people have taken the opportunity to buy more expensive vehicles than they would normally buy. On the other hand, many who have been working from home during the extended lockdown have spent time re-evaluating the need to drive expensive cars. While less frequent use means lower services, maintenance and fuel costs, many people have come to realise that they are sitting with an ever-depreciating asset which is not being fully utilised.

When it comes to understanding the costs of financing a vehicle, it is important to take into account those costs over and above the monthly repayments, including comprehensive insurance premiums, maintenance, repairs, fuel, tyres, services, licensing, traffic fines, and parking. Before buying a new car, or trading in your current car to replace it with something more appropriate to your needs, it is always advisable to use an affordability calculator – with most financing institutions providing free online tools. That said, keep in mind that what you can afford to pay towards your vehicle repayments on a monthly basis and what you can actually afford in terms of your overall financial portfolio are two very different things.

If you’ve had experience buying a vehicle from a dealership, you will note that more emphasis is placed on the monthly repayments than on the actual purchase price of the vehicle. This is because car salespeople understand that, for most people, the ability to afford the monthly repayments is more important than calculating what the vehicle will actually cost over the term of the contract. Dealerships have a huge amount of flexibility when it comes to tailor-making a finance package that meets your monthly budget and, because of this, many people end up buying cars that they actually cannot afford. Simply put, just because you can afford the monthly repayment does not mean that you can afford the car.

When it comes to financing a car, the Instalment Sale is the most common type of agreement, which is effectively an agreement between you and your bank which enables you to take delivery of the car while you pay back the loan over a pre-determined period of time. Most vehicle financing institutions offer a minimum financing period of 12 months up to a maximum of 72 months. Naturally, the longer your vehicle finance term, the lower your monthly repayments will be, although you will ultimately pay more interest. On the other hand, a shorter financing period will result in higher monthly repayments, but you will save on interest. Generally speaking, banks do not offer financing on vehicles older than ten years, except in the case of vintage and/or classic vehicles.

Although it is important to shop around for the most favourable financing package, all banks take the same considerations into account, with their finance products all being fairly similar. In many instances, it boils down to which financing institution is easier to do business with in terms of providing a seamless, swift transaction. Each application for vehicle finance is considered on an individual basis, taking into account your credit record, risk profile, the size of the loan, and repayment history on previous loans. Remember, your credit record plays an important role in determining whether you qualify for a loan and the better your score, the lower the risk you present to the bank and the more favourable your interest rates are likely to be. Depending on your risk, the financing institution may require that you pay a deposit. The bigger the deposit you put down on your vehicle, the less risk you present to the financial institution you are borrowing from which should result in a smaller monthly repayment and a lower interest rate.

If you choose a fixed interest rate, you will be charged the same interest rate for the duration of your financing agreement, regardless of whether prime interest fluctuates or not. This means that your monthly repayments will stay the same and you won’t have any unwanted surprises when interest rates rise. If you’ve linked your interest to the prime lending rate, your monthly repayment will fluctuate in line with interest changes. While this can protect you from the downside, if interest rates fall you will not benefit from the rate decrease. Monthly repayments on a fixed rate are generally higher than those of a linked rate as the risk of any rate change is borne by the financing institution.

In order to make a vehicle more affordable on a monthly basis, many dealerships structure financing agreements which include a balloon payment, or residual value, at the end of the contract term. A balloon payment is where a percentage of the vehicle’s value is taken off the financed amount, with this balloon or residual amount becoming payable as a lump sum at the end of the financing period. While this has the effect of lowering your monthly repayments – thereby making the vehicle appear more ‘affordable’ – you still pay interest on the residual amount and will need to ensure that you have a capital amount available at the end of the contract or risk having to sell your car. Another option is to re-finance the vehicle, but this will cost you even more in the long term and can result in you entering a cycle of debt that is difficult to extract yourself from. The structuring of balloon payments makes even hugely expensive vehicles accessible to anyone.

Remember, while your residual payment is used to reduce your monthly repayments, it still forms part of your loan agreement. So, if you want to pay off your vehicle quicker, the settlement agreement will include the residual amount. If you decide to increase your monthly repayments in order to pay off your car quicker, these repayments do not reduce your residual payment, but only the debt that you are paying off monthly. To reduce your balloon payment, you will need to check the terms of your financing agreement and then specifically advise your bank that any additional repayments are to be used to reduce the balloon amount.

A Full Maintenance Lease is a form of financing where you effectively lease the vehicle for an agreed period of time in exchange for a monthly fee or rental. This fee covers all costs including maintenance, service, tyres, oil filters and wiper blades. After the rental term, you are required to hand back the car and replace it with a new one. The monthly repayments for a Full Maintenance Lease are lower than an Instalment Sale and there are no nasty residual payments at the end of the term. However, you never actually own the vehicle and there are strict limits on the distance you are allowed to travel, with penalties for excessive mileage.

A Guaranteed Buy-Back, also known as a Guaranteed Future Value, an agreement where the financing institution agrees to buy back the vehicle at the end of the contract term, although this type of agreement also includes strict terms and conditions that the owner must adhere to.

Documentation required when applying for finance includes invoice from the dealer, ID document, driver’s license, proof of comprehensive insurance, and last 3 months’ of bank statements and salary advices. If you’re financing your vehicle, you will be required to provide proof of comprehensive insurance but remember that you are free to insure the vehicle through your own insurer and are not required to make use of the bank’s insurer. Also keep in mind that drivers between the age of 18 and 25 are considered high risk by most insurance companies, which means that your premiums are likely to be higher – although there are steps you can take to bring your premiums down. One option is to do a defensive driving course which will reduce your risk. Keep in mind that the insurer will take into account the type of car you drive, with more powerful cars attracting higher premiums. It also helps to have your insurance policy in your name as soon as possible so that you can start building up a no-claims driving history.

According to Wesbank, the best time to trade in a vehicle is when the trade value is in line with the settlement amount owed to the bank – referred to as the breakeven point. If you trade in before this point, you may have to put in a sum of money to get out of your finance agreement. For instance, if your car’s trade-in value is R150 000 and you still owe the bank R200 000, you will need to pay in R50 000 to get out of the agreement. The majority of Wesbank’s vehicle finance contracts are over a 72-month period, with the breakeven point arriving between 24 and 36 months, depending on the size of the deposit, the type of vehicle, whether you have made additional repayments, etc.

If you are planning on trading in your existing vehicle which is still under finance, some dealerships will offer what is known as ‘deal assist’. So, if the trade-in amount offered by the dealership is less then the finance settlement value, you will be required to pay in the difference in order to settle your loan. In such circumstances, the dealership can provide you with a deal assistance amount, for instance R20 000, which you can use to settle this difference, pay a deposit, defer your new repayments, take in cash, or a combination of all three.

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