The best way to finance a car
BUFFERING: CONSIDER INTEREST RATE HIKES
Short-term ease of repayment can translate into substantial pain later. Moneyweb
Moneyweb used Absa’s vehicle finance calculator, based on a default finance rate of 12.25% (prime + 2%), to show six financing scenarios for a vehicle priced at R200 000.
Note, the interest rate the bank grants depends on your credit risk profile.
Applying for finance for a R200 000 car.
Tip: Tell the dealership you’ll pay the once-off initiation fee upfront in cash so it’s not added to the full-term loan and you don’t pay interest on it. As table one shows, a shorter loan period and larger deposit significantly decreases the interest you pay long term.
Absa Vehicle and Asset Finance managing executive Faisal Mkhize says choosing a balloon payment and a 72-month repayment period means the capital portion of the loan doesn’t decrease as quickly as without a balloon payment.
Mkhize notes that in scenario five, saving for a 10% deposit on a R200 000 car could mean postponing the purchase by four to five months, but you’d save almost R28 000 on interest over 72 months and have no balloon payment.
Vehicle finance contracts typically last five years, so when calculating affordability, consider a 3% interest rate hike on the rate offered and see if you can still afford the instalment. Using your access bond FNB Home Finance CEO Lee Mhlongo says a good proxy for a mortgage bond’s interest rate is 10.25%. “Consumers can access additional prepaid funds on their FNB home loans.”
By using a lump sum from your home loan facility to pay cash for the car you’d pay a significantly lower interest rate. However, you must structure your repayments to pay off the lump sum amount borrowed over five years, not the full home loan term (20 years).
Table two shows a 15-year difference in your repayments term can mean paying R214 745.66 more in interest.
However, Gradidge-Mahura Investments executive director Craig Gradidge advises separate financing for your car, rather than via a home loan.