Is be­low-prime ve­hi­cle fi­nance a good deal?

CityPress - - Business - AN­GELIQUE RUZ­ICKA busi­ness@city­press.co.za

Bor­row­ing money to buy a car can be ex­pen­sive. Un­less you have a per­fect credit score, you’d be lucky to se­cure ve­hi­cle fi­nance at the prime lend­ing rate (10.5%). How­ever, some deal­er­ships charge more than this.

There are two types of in­ter­est rates – linked and fixed. A fixed rate means you will be charged the same agreed-upon rate for the du­ra­tion of the loan and your monthly in­stal­ment will stay the same. A linked rate means that the rate is linked to the prime lend­ing rate of South Africa, so when this in­creases, so will your in­stal­ment. When it de­creases, you’ll pay less.

Wy­nand van Vu­uren, head of claims and le­gal at King Price, says: “It’s up to you which rate you choose. Go­ing with the fixed op­tion means that there won’t be any surprises. Choos­ing a linked rate gives you the chance to ben­e­fit from smaller pay­ments if the in­ter­est rate goes down.”

In light of this, it’s un­der­stand­able how be­low-prime fi­nance deals can be en­tic­ing.

BMW, for ex­am­ple, is of­fer­ing the BMW 118i with up to prime -3.48% in­ter­est, which means you could pay just 7.02% in in­ter­est (linked).

Ac­cord­ing to Ed­ward Mak­wana, man­ager: group prod­uct com­mu­ni­ca­tions at BMW SA, buy­ers qual­ify by sim­ply go­ing through the stan­dard credit ap­proval process.

“If it is a spe­cial cam­paign we are run­ning and they qual­ify for credit, they will ob­tain the rate,” says Mak­wana.

TOO GOOD TO BE TRUE?

To fig­ure out if the of­fers are too good to be true, we need to know why some deal­ers of­fer this type of deal.

The re­al­ity is that new ve­hi­cle sales are de­clin­ing and some deal­er­ships are try­ing to in­vig­o­rate the mar­ket. Statis­tics from the Na­tional As­so­ci­a­tion of Au­to­mo­bile Man­u­fac­tur­ers of SA show a quar­ter-on-quar­ter de­cline of 12% in the sale of new pas­sen­ger ve­hi­cles and a de­cline of 9% of new light com­mer­cial ve­hi­cles from the fourth quar­ter of 2015 to the same pe­riod last year.

Sales are dip­ping be­cause of an in­crease in pric­ing. Ac­cord­ing to the lat­est Tran­sUnion SA Ve­hi­cle Pric­ing Index, the rate of new and used ve­hi­cle pric­ing in­creased to 9.4% and 3.3% in the fourth quar­ter of last year, from 4.6% and 1.6% in the same pe­riod in 2015.

Mean­while, av­er­age monthly re­pay­ments have in­creased from R4 656 to R4 910 year on year.

This has, ac­cord­ing to Der­ick de Vries, the CEO of Auto In­for­ma­tion So­lu­tions at Tran­sUnion, re­sulted in con­sumers fi­nanc­ing cheaper new ve­hi­cles or more ex­pen­sive used ve­hi­cles, and the used-to-new ra­tio shows that fi­nance houses are fi­nanc­ing 2.5 used ve­hi­cles for ev­ery one new ve­hi­cle. This is prob­a­bly not what the likes of BMW have in mind.

The be­low-prime deals are meant to com­bat this pref­er­ence in fi­nanc­ing used and cheaper ve­hi­cles. But don’t feel sorry for the deal­er­ships by think­ing they are los­ing out – the truth is, these deals are fi­nanced us­ing the man­u­fac­turer’s re­bate.

BAL­LOON PAY­MENTS

Be­low-prime in­ter­est rate deals could also be sub­ject to a bal­loon pay­ment. This may not al­ways be a good thing. One com­men­ta­tor, who de­clined to be named, warns cus­tomers to be vig­i­lant and read the terms and con­di­tions of the deal, as well as the sale agree­ment. Find out if there are bal­loon pay­ments (resid­u­als) at­tached and find out if you are be­ing sold end-of-range mod­els, which de­pre­ci­ate faster than newer mod­els.

In the in­stance of BMW, the terms on the web­site state: “Resid­ual may ap­ply sub­ject to deal struc­ture.”

While a resid­ual, which refers to the lump sum you pay at the end of your loan term, does re­duce your monthly in­stal­ment, you have to en­sure that you can af­ford to pay it when the time comes. Of­ten, cus­tomers sim­ply take out another loan to deal with the resid­ual in­stead of sav­ing some of their money to pay off the bal­loon pay­ment. It’s gen­er­ally ad­vised to only take on a bal­loon pay­ment struc­ture if you have the sav­ings to back it up, or the dis­ci­pline to put money aside for it.

Van Vu­uren says: “If you’re wor­ried about the pos­si­bil­ity of not mak­ing this pay­ment, you can take out in­sur­ance against non­pay­ment, or you can take short­fall in­sur­ance cover in case your car is writ­ten off or hi­jacked while you are still li­able for the re­main­ing loan amount.”

Ul­ti­mately, be­low-prime deals could work for you if you can af­ford the bal­loon pay­ments at the end of the loan term, and if you get the right car for you. When you’re in the mar­ket to buy a new or used car, be ready to ne­go­ti­ate.

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