There are many, sometimes creative, vehicle financing options out there designed to make the repayments affordable.
But car buyers often find themselves owing more than their vehicle is worth, which can trap them in a cycle of debt. The difference between the amount owing and the value of the vehicle is sometimes re-financed and the problem grows.
So it pays to understand just how your vehicle finance will work and to be sure you can repay the vehicle over a reasonable period of time to ensure you never owe more than you own.
Once you have decided to finance a car, you can apply through the dealership or directly with a bank or finance house. Either way, the application will end up with a vehicle finance house, but there are some differences in the processes.
Applying through the dealership can be more convenient and less intimidating. The dealership will fill out the forms, collect the necessary documents and apply to financing houses for quotes.
Aspects of the agreement that will have a material effect on the amount your car costs you are the length of the financing term and the interest rate you pay.
Take care to understand the agreement and don’t be shy to ask questions. It is foolish to shop around for the best priced vehicle and not the best finance package.
Financial institutions will check your income and expenses and your credit score to decide how much to lend you, at what rate of interest and on what terms.
The better your credit report, the lower the risk you present and the more favourable your interest rate is likely to be.
The interest rate you are offered will also depend on other factors, such as the type of car, its age and mileage and the deposit you put down. The more likely the lender is to be able to recover what it has lent you should you default, the more favourable the terms you will be offered.
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TIP: Consider getting finance pre-approved as it is likely to help you to focus on what you can afford and help you stick to your budget. |
The interest rate, is usually linked to the prime lending rate, and may be fixed for the term of the agreement or it may go up or down with the country’s interest rates. If they are variable, you need to be prepared for rising interest which will increase your repayments.
Typically, vehicle finance agreements run for between 12 months and 72 months, with 60 months or five years being the standard agreement.
Some finance houses offer agreements that allow you to finance a vehicle over 84 months (seven years) and even 96 months (eight years). Longer agreements make repayments appear more affordable but will cost you more in interest over the long-term.
Remember that the vehicle finance house will most probably insist that you have credit life cover to cover the debt if you die, are disabled or retrenched.
 REMEMBER:Your monthly instalment is not a good reflection of what the car is costing you. It is more meaningful to consider the total amount you will pay for the vehicle over the full term. Another useful number is the total interest you will pay. It is not unheard of for someone to end up paying double the agreed price once the finance costs are added. |
Some vehicle finance agreements are offered with a balloon payment to make them more affordable. A balloon payment is a deferred debt, a little like a deposit that is paid at the end of the cycle. The maximum allowed is 35% of the cost of the car. 
The sting in the tail is that you will be paying interest on this amount for the whole term. Supporters argue that balloon payments make ownership of decent, reliable cars possible for many; detractors say they simply make unaffordable cars seem affordable.
If you were to buy a car for R400,000 with a balloon payment of 35% your monthly instalments would cover the capital balance of R260,000 and the interest for the R400,000. The remaining R140,000 (the balloon payment) will be due at the end of your loan term, which is usually 60 months.
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TIP: The best way to manage the overall cost is to put down as large a deposit as you can manage, pay off the loan in the shortest possible time and avoid balloon payments. |
You must pay the full interest during the financing term, only the balloon capital amount can be deferred. However, buyers may find themselves unable to pay this capital amount at the end so they refinance it, which means it incurs further interest. The balloon can be quite a liability since you will be paying interest on it for the full term and then potentially further interest on the refinanced amount.
Remembering that a new car loses value as it is driven off the showroom floor, a finance deal that allows you to defer 35% of the cost of the car for the full repayment term could mean you owe the bank close to, or more than, what it is worth after years of “paying it off”.
When a vehicle’s trade-in value is equal to, or more than, what you owe the bank it is known as the breakeven point and a trade-in becomes financially viable. 
Many people upgrade their car when it reaches breakeven point. This is not ideal since you will have nothing to show for the payments you have already made.
Trading in your car before the break-even point, and refinancing the shortfall, is worse; it means you are paying off a new car as well as an excess on the old car, which pushes breakeven point of the new deal further out into the future.
There are many car finance calculators online. Try different ones. Input different deposits and balloon sizes and length of finance term to get a sense of different outcomes. There are also many online tools that calculate the expected depreciation rate of cars. This could be the deciding factor between two similarly priced cars.
Buying a car costs a lot more than the price of the car. Bear this in mind when you choose and be careful about how the finance agreement is structured. Remember your repayments may go up with rising interest rates. Having a car can become a real financial liability when all the costs add up to more than you expected and can afford.
Be careful of stretching your budget so far that you cannot keep up with your repayments and fall into arrears. Defaulting on your payment will have an impact beyond your vehicle finance agreement. A default will damage your credit report.
If you are in danger of falling behind on your payments, approach your vehicle finance house to discuss the payment terms. In most cases, lenders will have processes to assist you if you are in financial difficulty.
Remember there is the “opportunity cost” of spending a fortune on a car every month. Think of what you might save if you buy a cheaper vehicle and use additional money to pay down your credit card balance, or save for retirement and get a tax refund.
