There are numerous ways of financing the purchase of a new vehicle. MOTOR gives some basic tips on your best options
No matter how many times you are fortunate enough to do it, buying a vehicle is an emotional experience and needs careful forethought if it is to be a satisfying and, critically, affordable experience. Whether the vehicle is new or used, choosing the right model is one side of the equation; the other is financing the deal, and once the monthly repayments begin, if you have over-stepped your budget the consequences can be cruel. As the cost of motoring – and living in general – continually rises, you certainly do not want to exhaust your means and end up being black-listed by a credit bureau, so what is the sensible way of buying that new set of wheels?
With more than four decades of expertise and market leadership in vehicle finance, WesBank offers some useful advice. ‘The most important part of buying a new vehicle is knowing what you can afford,’ says Rudolf Mahoney, the company’s Head of Brand and Communications. ‘If you have saved up money to buy a car cash, your budget will be determined by your savings. However, if you need to finance a deal, as around 65% of South Africans do, then you will need a loan.’ Loans are paid off monthly and to calculate how much you can afford to pay, you need to draw up a budget; write down exactly how much money is coming in, how much is going out, and see how much is left over after all the expenses are paid. Paying a deposit will lower the monthly instalment or can be used to lessen the loan period.
However, affordability is not just about how much money you have left to spend, it is also about how much money you can manage as a monthly repayment for a car. ‘For example, if your budget shows you have R5 000 left after all expenses, it does not mean you can buy a car that costs R5 000 per month. That amount has to cover all the other costs of vehicle ownership, including fuel, maintenance and insurance as well as any other ad hoc or unexpected expenses that crop up,’ Mahoney explains. ‘All of these costs should add up to less than your total vehicle-buying budget, which also means leaving room for any increases in these expenses. Remember, insurance premiums can increase each year, tyres may need to be replaced and fuel costs are almost continually on the rise. It is therefore best to look at your budget over five or six years, the most popular contract repayment period for car loans.’
While it is one of the costs that you have to include in your budget, it bears repeating that insurance is an essential item for anybody with a car – even if it is not financed. If you use vehicle finance, it is a contractual requirement to have an active comprehensive insurance policy. In the event of an accident, a comprehensive insurance policy will pay for damages incurred, even if you are at fault. If the car is uneconomical to repair, otherwise known as a ‘write-off’, or if it is stolen, the insurance company will settle the remainder of the loan balance with the bank. This means you don’t have to worry about paying for expensive accident repairs – or paying off a loan for a car that you can no longer drive.
With the implementation of the National Credit Act (NCA) in 2007, it is possible for you to structure your finance contract in a way that suits your affordability. This means that you can choose the contract term, the type of interest rate, whether you want to pay a deposit and if you would like to use a balloon payment, i.e. a payment, generally between 5% and 60% of the total purchase price, made at the end of a contract term. For example, if you want to finance a car of R100 000 with a 10% balloon payment, then you will pay off R90 000 over the agreed contract period and make a R10 000 payment at the end of the contract term. Just remember to make allowance in your budgeting for that final payment…
Contract terms are the period of time over which you repay the loan. They can be between 12 and 72 months – shorter terms will have higher monthly instalments, while longer terms will yield a lower monthly payment. Two types of interest rate are available to consumers, namely fixed and linked. A fixed interest rate will be slightly higher than a linked rate, but will remain the same for the duration of the loan. A linked interest rate will change whenever the South African Reserve Bank changes the interest rate; if the SARB increases the rate, your monthly instalments will also increase, and vice versa.
Use the flexibility in structuring your contract to make sure the monthly instalment is affordable and that you pay off your loan as soon as possible. For anyone completely unfamiliar with vehicle finance and the car-buying process, WesBank offers a comprehensive checklist to help you understand each step of the procedure leading up to signing on the dotted line with confidence. Check the website www.wesbank.co.za.