Buying a new car may be the least of your worries, but obtaining the best finance for it may be what keeps you awake at night.
Buying a new car may be the least of your worries, but obtaining the best finance for it may be what keeps you awake at night.
Even with the National Credit Act regulating the Finance Industry since 1 June 2007, various pitfalls and hidden burdens still lurk along the path to a paid off vehicle.
The first step to take when looking to finance a new vehicle is to shop around, the major finance houses that offer sound financing options are Absa Vehicle and Asset Finance, Investec Private Bank, NedCredit through NedBank, Stannic through Standard Bank and WesBank, a division of First Rand Bank.
All these banks offer vehicle finance divisions and should be consulted when shopping around for the most affordable vehicle finance option for you.
Staying with your own bank, if you have a long history of good creditworthiness with them, is beneficial.
if you have a track record of no overdraft or outstanding credit payments or a well tended home loan, your personal bank may be able to offer you a very competitive rate of interest below prime.
A good source of vehicle finance comparison between the banks is bankmonitor.co.za a product of Infochoice that compares and provides information on a range of finance related products on offer by various banks.
Once you have found the best rate of interest for you, the next step is understanding the terms of the contract.
The most common terms for vehicle finance are the instalment sale option, which most household consumers would pursue; the lease option, which would suit the business buyers of vehicles as the cost of leasing can infer added tax claims that can be offset against income.
The difference here is that the asset can still be purchased at the end of the agreement for a nominal sum to the bank.
Rentals are a third option but as you probably want to own the vehicle at the end of the payment period this option won’t concern you.
So you have decided to buy your vehicle on the normal instalment plan. What needs to be examined now is the terms of the contract.
The terms which often catch the unwary and often overeager buyer out are the lure of cheaper instalments by leaving a balloon payment for the end.
Balloon payments
What is a balloon payment, you may ask? It is often called residual value but has a fundamental difference. While both the balloon payment and the residual value entail a lump sum payment that needs to be paid for at the end of the contract, the difference is that the residual value payment risk sits with the finance house while it sits with the buyer when balloon payments are used.
What does this mean? Well if you are forced to default on the residual value then you are able to hand the vehicle over to the finance division to cover all costs.
The balloon payment however requires the buyer to pay the amount in full. The average buyer in South Africa enters an instalment option with a balloon payment at the end, as the balloon payment offers lower upfront payment rates per month and generally lowers the cost of financing the vehicle due to the lump sum waiting to be paid off at the end.
Caveat Emptor
A point of caution here is that the buyer should always find out what the lump sum payment for the balloon will be in the end, as a vast array of car payments and interest rates can be seductively offered up to the buyer, all by adjusting the amount in the balloon payment in the end.
The buyer should always be aware of this amount and plan their finances accordingly. A healthy balloon of 10% will save the buyer from any unforeseen cash flow problems at the end of the contract term.
If you are wary of what your financial position will be in 54 to 60 months time, then a solid plan is to take the savings made on monthly instalments and invest them into a low risk asset to earn returns and build towards paying back the balloon amount.
One way to deal with this balloon but, a last option, is to refinance it. this entails taking the balloon amount and repaying it over monthly instalments usually at a higher rate of interest.
This option may just make that new car far more expensive than you originally bought it for. So you should be well on your way to enjoying your car worry free, points to remember are always recheck the interest rate applicable to your vehicle finance on the contract, check the contract terms and find out the amount of residual or balloon payment due at the end of the contract.
Banks have their own version of a vehicle finance calculator on their websites, so play around and get an idea of just what that new car might cost you.
