WHAT YOU SHOULD CONSIDER BEFORE YOU BUY A CAR
Marcel de Klerk, the head of Vehicle and Asset Finance at Absa, has the following advice if you are considering buying a new car:
Put down a minimum deposit of 10 percent.
Don’t sign a hire purchase contract for a period of longer than 60 months. If you are tempted to do so in order to reduce the monthly repayments, it is likely that you cannot afford the car.
Factor in the cost of insurance. Phone your insurer and ask for a quote to get an idea what your premiums will be on a particular model.
Your car repayments should not be more than about 25 percent of your gross monthly income.
Be very wary of deals that include a residual amount. Ideally, your repayment terms should not include a residual amount.
A residual deal refers to a finance agreement that includes a balloon payment, or residual value, which you must pay at the end of the finance term. The residual value can be relatively large compared with your monthly instalments.
When the finance term ends, you have two options: you can either sell the car and hope that the selling price will be enough to cover the residual value, or you can ask the bank to grant you further finance for the residual amount.
If you sign up for a residual deal, it should not be done to reduce the monthly repayments to 25 percent of your gross monthly income – this is the first indication that your affordability is stretched.
Ask the dealer to tell you what the expected market value of the car will be after 60 months – this information is available in the Mead & McGrouther blue book. You should only accept a residual amount that is well below the expected market value.
Typically, if you are going for a 60-month deal with a residual, the residual value should not be higher than 30 percent of the original price.