Looking to buy a car this year? – Here are a few finance options worth considering
According to NAAMSA (National Association of Automobile Manufacturers of South Africa) there were 41 698 new vehicle sales across the country in December 2019 alone.
That’s a lot of new vehicles added to the roads in one month!
Are you going to be part of NAAMSA’s statistics in 2020? If you’re thinking about buying a new car this year, and more importantly financing your wheels, you might find some real value in our latest post.
Do you know what options are available to you in terms of financing? If you don’t, stay tuned.
Let’s first talk you through the two interest rate options available to you. You can pick between:
- A fixed interest rate
- A variable interest rate
Should you decide to go with a fixed interest rate repayment structure, your monthly installment will remain the same right up until the loan is paid for in full. You will know exactly how much you are paying and there will be no surprises along the way.
The other option, a variable interest rate, is when the interest rate, you’ll pay on your loan, fluctuates according to the repo rate (benchmark interest rate in SA). This means there is an element of risk to consider. The rate could increase, which means your monthly installments would go up as a result, but they could also decrease which would mean you could pay less each month.
Basically, if the Reserve Bank decides to hike the interest rates, you’ll lose, but if they decide to cut the rates, you’ll win.
Now let’s take you through your finance options:
Installment sale agreement
In this instance you’d choose the car you want to buy, get a loan to finance the full price of the car (if you don’t put down a deposit) and agree to pay the financed amount back in monthly installments, over a fixed time frame.
You will only become the full owner of the vehicle once your loan is paid for in full, to the dealership. If you are unable, at any time, to pay the monthly installments, your vehicle can be repossessed.
This is a great option as you can finance your vehicle over a long stretch of time (maximum 72 months/6 years) and as a result make your monthly installments more affordable.
If you’re purchasing a new car, a balloon payment structure could help you because it would significantly lower your monthly repayments upfront. Your installments are discounted, but you’d still owe a lumpsum payment, to whichever finance institution you financed your car through, at the end of the credit agreement.
So, you pay less now, but owe a portion of the loan at the end.
Can you afford to make the large payment at the end of the agreement?
That’s the only potential draw back to a balloon payment.
If you don’t know how you will pay back anywhere between 20% and 30% of the car’s value, at the end of the loan agreement, you could be in for a nasty surprise and maybe this option is one you should skip.
Do you want to own the car outright?
When you lease a vehicle, you simply pay for the use of that vehicle for a fixed period. At the end of the agreement, you simply hand the car back to the dealership. You’ll basically be renting the car and never end up owning it.
Leasing a vehicle has its benefits because you only pay to use the vehicle for a specific period of time. The car isn’t yours, and you get to hand the keys back and pick up another lease when your contract has run its course.
There are no huge balloon payments at the end of the agreement, and you aren’t tied into a 6-year installment sale agreement.
The only downside is that there may be some limitations in terms of usage (you may only be allowed to clock up a certain amount of kms during the lease term) and you will never own the car, as an asset, to one day sell. But it does give you the option to change models and makes of cars more often, so boredom doesn’t set it.
Guaranteed Future Value
This is the last finance option we’re going to run through, and it’s also becoming way more popular in South Africa.
As you know a vehicle start depreciating in value as soon as you drive it off the showroom floor, making it a depreciating asset. This finance option allows consumers to not have to pay a balloon payment, at the end of their finance contract, that is larger than the actual value of the vehicle.
This is how it works – you’ll choose your car, pay a deposit, decide how many months you want the contract to be for (how long you will pay the monthly installments for) and decide how much mileage you will agree to clock up in that set time frame. You will be paying for the use of the car.
The Guaranteed Future Value payment method is then essentially worked around what the future value of the car will be, after a given amount of years, taking into account the condition of the car, the amount of mileage you decide to stick to, and if it’s been well looked after and serviced regularly. This amount is then ‘guaranteed’ when you purchase the car.
This guaranteed future value for the vehicle becomes a balloon payment.
Let us say you decide you want the contract to be for 3 years. After the 3 years is up you will have three options.
1: You can trade the car in and sign up for a new GFV deal
2: You can pay the final GFV amount and take ownership of the vehicle
3: You can return the car to the dealership and be free of any money deals. This means that provided you have looked after the car, haven’t exceeded the mileage limit and serviced the vehicle at authorized service centers, you will not owe a cent.
Whichever route you decide to take, just make sure that you’ve considered all your options and asked all the right questions.
Until next time.
The MoneyShop Team