Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

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.

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