So you’re looking at a new second-hand car, but with the economy as it is and the cost of living rising, you need to look into financing options to avoid over-committing yourself. But where to start? ‘Traditionally, South Africans have leaned towards bank financing when buying a vehicle, but there are more options that can be explored,’ says Jakkie Olivier, CEO of the Retail Motor Industry Organisation (RMI).
How do you decide which option is best? Olivier encourages prospective buyers to do their homework first; research the options and always be aware of the fine print. ‘Bank finance can be costly as a large chunk of the monthly instalment goes towards interest payment,’ he says, adding that it is a mistake to base your affordability on the repayment only. Research has shown that in certain market conditions, the actual monthly instalment accounts for less than 50% of the total cost of ownership. ‘But whichever finance option is chosen, consumers should make sure they know what they are getting from the start,’ Olivier says. Consumers should phone around and get their own quotes, negotiating the lowest possible interest rate, don’t just accept the first one you’re offered. Then it is up to the seller to match or beat your best quote.
Instalment finance is the most common payment method, paying off the amount in monthly instalments for up to six years (72 months), either with or without a deposit. Interest adds a lot to the car’s advertised price; the longer the term, the more interest you pay. A benefit of instalment finance is that you own the car outright after your last payment of the instalment term.
‘Ideally, you should put down a sizeable deposit and structure the loan over the shortest possible time,” says Gumtree.co.za. ‘You can pay off the car early without penalty if your loan is less than R250 000, but a penalty will apply if it is more than that.’ However, if your circumstances deteriorate during the term of the finance deal, you could battle or fail to keep up with the payments. If the value of your vehicle has depreciated significantly, selling it or, worse, having it repossessed and auctioned by the bank, could leave you without wheels and still owing money to the bank! A total no-go scenario.
A balloon, or residual payment is ‘an agreed inflated final payment of a loan that is paid in full at the end of the loan agreement’, explains Gumtree.co.za. So, having paid instalments for five or six years, you still have a sizeable balance of the retail price to pay in a lump sum. You can either choose to refinance the balloon payment, or trade in the car, whereby the balloon payment is then settled and you can enter a new finance agreement.
Wesbank’s head of marketing Rudolf Mahoney says that, ‘There is no set value for balloon amounts and they differ from every make and model. A very popular car such as a VW Polo can even be done on a 50% balloon. It’s all about supply and demand dynamics.’
It can be seen that after paying the instalments of a balloon payment plan, the vehicle is still not yours and the balance is then due in full. ‘A lot can happen during six years, so this is really not a good financing option. If it’s the only way you can afford to finance a vehicle, you can’t afford it: rather opt for something cheaper,’ recommends Gumtree.co.za.
Other financing alternatives include leasing, for which you only drive the vehicle for a fixed period and your monthly payments go towards paying for the depreciation, not ownership. But, not surprisingly, ‘terms and conditions apply’ here such as mileage limits, possible servicing/maintenance cost liability, and there will be penalties for non-compliance. And don’t forget that the vehicle is never yours. However, when the lease expires you don’t have to worry about selling or trading-in the vehicle.
Other financing alternatives include Guaranteed Buy-Backs, which tend to be structured at 36-month terms with 60% residual value. This method allows you to get a new vehicle every three years at a similar instalment but, again, strict ‘Ts&Cs’ apply, and it does not cater for high-mileage drivers.
Finally, the National Credit Act makes it illegal for a person to take over someone else’s debt without a proper credit assessment and financial health check. ‘Nedbank doesn’t condone or knowingly allow it without cancellation of the existing contract and entering a new one with the new finance applicant,” says Nedbank/MFC managing executive Trevor Browse.
Similarly, he warns that take-overs are a really bad idea. ‘A client will be in breach of his finance contract if he participates in such a scheme,’ he said. ‘The person who is interested in taking over the car must settle the finance deal, either by means of a private vehicle finance deal or in cash. The bank will then release the eNatis documents.’
It is easy to underestimate vague extra costs when working things out in your head, warns Santam. The increasing cost of fuel, minor running repairs, check-ups, a new battery and replacing tyres can often end up making your purchase cost more than you anticipated. Write down and add up the actual costs on paper. Seemingly small details can be important. For instance, consider if the car is still in production as this can determine the price and availability of spare parts.
Wesbank’s Top 5 financing DOs and DON’Ts
• Draw up a budget to establish affordability.
• Leave enough spare cash in your budget to absorb rising costs such as fuel and interest rates.
• Take the time to read and understand your finance contract.
• Contact the bank if you are in a situation where you cannot meet your financial commitments.
• Make sure you always have comprehensive insurance on your financed vehicle.
• Overextend your budget.
• Provide the bank with false information about your affordability.
• Cancel insurance when you are in a financial bind.
• Rely on a large balloon payment to make your instalments more affordable.
• Forget to include all costs in your mobility budget: petrol, insurance, and maintenance.