All you must know about car finance
For most of us, the idea of navigating through a car finance contract evokes the same feelings we would have at the thought of having dental surgery without anaesthetic – it’s that daunting, and with good reason!
Car finance contracts can be tricky if you don’t take the time or have the patience to go through them thoroughly. This is likely to result in you signing a deal that doesn’t work for you. Yes, the law is in place to ensure that you don’t purchase a vehicle that exceeds your financial capabilities. But, on the other hand, there are products and services that make it legally possible for you to get any car you want. Let’s explore the three most common types of car finance options.
This is the most common type of finance available. It is a financial loan agreement between the purchaser (you) and financier (bank or private finance entity), when you are given credit to buy a car. The agreement states that you will pay regular amounts to the financier over an agreed period of time to cover the loan.
You own the vehicle at the end of the lease period.
There are no restrictions such as limited mileage.
Depending on the financier, you could negotiate an early settlement – if you won the lottery and wanted to pay off the vehicle in one lump sum.
Failure to honour the set monthly payments puts you at risk of tarnishing your credit profile and/or having your vehicle repossessed. The car is owned by the financier until the full loan has been settled.
In the market for a new car? It’s in your best interest
to understand financing options before signing the deal and driving off in your new wheels.
In this type of agreement, the financier permits you to buy a car at a lower monthly instalment than what it would cost on a standard hire purchase agreement, and with one large once-off payment at the end of the loan period. You can make this final lump sum at the end of the contract or use it to refinance or extend the payment period of the same car. Should you go for this option, make sure that you understand the interest implications on both the monthly repayment and final balloon amounts.
Monthly instalments are usually lower than on a standard hire purchase agreement. A large portion of the debt is deferred for the final payment. Some see this as a way to save on a monthly basis, but that only works if the money you are saving is put away towards the final payment. Essentially, this agreement allows you to purchase a car that is not really within your financial abilities.
You will need to have the balloon amount at the end of the loan period, and that could be a lot of money!
Refinancing your car is a clever way of easily honouring your monthly instalments. By doing this, the financier releases money for the outstanding balance on your car, and spreads the repayments over a longer period. You are then able to keep it while paying less on the monthly repayments.
Should your income status change due to retrenchment, you are able to retain your car while paying lower instalments each month. Living in an image conscious society, this agreement allows you to keep your social status intact, without anyone knowing if you have financial difficulties or not. It helps you to reduce your overall monthly expenses, and redirects much-needed cash to other living expenses.
Always check if there are any interest implications. You are ‘stuck’ with your current car for a much-longer period of time. Regardless of the finance contract you take, most financiers will want to be assured that you are good for the line of credit. So, they will need the following basic information: Proof that you are over the age of 18, a South African citizen or permanent resident; That you have a valid driving licence; Have a clear credit rating; Earn a minimum of R6 500 per month.
In the excitement of getting new wheels, first-time buyers sometimes let emotions take over, and make mistakes that could lead to long-term regret, such as:
1. Not shopping around adequately.
Solution: Don’t rush. There are plenty of ways in which you can do your research, such as dealers and journalists’ websites, etc. Get information from people who drive the type of car you want, and also keep an eye out for clearances and specials where you could get a bargain! 2. Not correctly calculating the monthly running costs of your new ride.
Solution: Take into honest account your entire transportation budget; not just the monthly repayments. Remember that you will probably need a full tank of fuel per week, and that monthly insurance is a must. Sadly, most people opt to cancel their insurance after the first month, but this is a bad idea that could come back to bite you in the event of an accident, no matter who was at fault.
3. Feeling pressure to buy a new car (instead of a second-hand one).
Solution: Do what is right for your pocket long-term by looking at pre-loved vehicles as there are quite a few advantages to owning one. New cars are more expensive and depreciate the moment you drive them out of the dealership. Used cars are already depreciated, and have a lesser future depreciation rate. They are also usually much cheaper to insure.