MO­TOR­ING

Bona - - Contents - By Vuyi Mpofu

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.

STAN­DARD HIRE

PUR­CHASE AGREE­MENT

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.

Pros

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.

Cons

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.

RESID­UAL/BAL­LOON

PUR­CHASE AGREE­MENT

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.

Pros

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.

Cons

You will need to have the bal­loon amount at the end of the loan pe­riod, and that could be a lot of money!

RE­FI­NANCE

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.

Pros

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.

Cons

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.

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