Other than property, a car is probably the most expensive thing you’ll ever buy, and that’s a bit of a problem if you need one (most of us do) and you don’t have the money available. Generally it’s better to put off a purchase until you have the cash, but if you absolutely had to have a car and didn’t have the money, you could take the vehicle finance route. Here we take a look at what that would actually entail.

Loan features

When shopping around, consider the following factors and how they affect affordability and the overall cost of a loan.

Interest rates

One of the first things you need to understand about vehicle finance is that the interest attached to it can come in two forms; fixed and linked. If there’s one thing you need to understand fully when it comes to vehicle financing, it’s the interest rate. This will determine the total amount you will pay for your car at the end of your contract. Here are your two options:

A fixed rate

A fixed interest rate, as the term suggests, remains exactly the same throughout the duration of the vehicle financing contract, with no chance of it fluctuating. While this means that your loan’s interest rate can’t ever go down, the converse is true as well. With a fixed interest rate, you are protected against volatile interest rates, which could lead to your interest rate soaring. From a monthly repayment standpoint, it also makes it a lot easier to budget and know exactly what will be required of you every month for the duration of the contract. 

A linked rate

If the fixed rate doesn’t appeal to you, the other option you have is a linked interest rate. These rates are lined to the prime lending rate of a country. The great news is that if the prime lending rate drops, so too will your monthly instalment. The bad news is that should the prime lending rate increase, your monthly instalments will increase with it. At the end of the day, the right option for you will be determined by the flexibility you have within your budget.

Loan term

A vehicle financing contract will be valid for a predetermined period of time, typically between 12 and 72 months, over which you will prepay the money loaned to you, with interest and fees. While it may be tempting to pay back as little as possible every month, it’s important to know that it’s going to cost you far more than if you’d gone with higher monthly instalments and a shorter repayment period.

It also means that it will take you a long time to get your settlement value to match its trade-in value, which means, if you were to sell the vehicle, you may only just cover the cost of the loan. The best thing to do is pay as much as you can each month and opt for the shortest repayment period possible.

Balloon payments 

“Balloon payment” is the term given to the amount of your loan that still needs to be paid at the end of the loan repayment period. This final instalment is usually paid as a lump sum. Balloon payments are designed to bring the monthly instalments down, but they also increase the amount of interest paid over the life of a loan. If necessary, the balloon payment can be refinanced if you are not able to pay it off as a lump sum, though this would only increase the cost of your loan. If you weren’t able to pay this back, you’d risk having your car repossessed.

Top-up cover

Top-up cover is something you can tag onto your car insurance to cover the difference between what is paid out by your insurer and what you still owe on your car in the event your car is stolen or in an accident and written off, because no one wants to pay for a car that isn’t even usable. You can speak to the Finance and Insurance representative (F&I) at the dealership to ensure this is included in your car insurance plan.

The application process

The whole process might not be as complicated as you have been led to believe, but it helps to know in advance how it all works. 

Vehicle research

Before you apply for finance, it’s important to make sure you do your research on vehicles and deals as this can reduce the size of the loan you need. Perhaps the car you have your eye is on special at a particular dealership, maybe there’s a demo model available, allowing you to get a good rate on a car that is practically brand new, or maybe it makes more sense for you to buy a second-hand car. 

Prepare your documents

The application process for vehicle financing can be long, which is why it’s advised to prepare everything you might need before you visit the dealership to save on time. The main documentation you will need includes your valid driver’s licence, your South African ID, either three months worth of bank statements or your last three payslips and a proof of residence that is less than three months old.

Submit application 

Before you sign on the dotted line, you can always discuss any lingering concerns or questions you may have with the F&I at the dealership. Accredited by FAIS, they are there to give you objective advice, in fact, they are legally obliged to do so. Your application should also be sent to all vehicle finance providers so you are presented with the best possible options—you do not have to use the prefered finance provider of the dealership (even if they have one in-house).

Accept an offer

Once your application is sent off, the vehicle finance providers will then put forward their offers on what they are willing to finance you, as well as the repayment term you have been approved for. You don’t have to take the first deal that’s sent to you. In fact, it’s advised that you wait until you see all options and that you ask the F&I to negotiate the rate you are offered. Lenders will offer you an interest rate based largely on your credit score.

Learn more

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