The National Automobile Dealers’ Association (NADA) has urged South Africans to ensure they are properly educated about the different forms of vehicle finance.
This comes amid the positive news that passenger car sales are continuing to show strength.
“The excitement of a new car shouldn’t overshadow the need for prudent financial planning,” says Brandon Cohen, National Chairperson of NADA.
“Car buyers in South Africa have several finance structures to choose from, and each has unique implications for monthly payments, total interest paid, and eventual ownership.”
“We urge all consumers to weigh the pros and cons of each option against their personal budget and future plans so that they enjoy their motoring experience both in financing and driving,” said Cohen.
Finance options
According to NADA, the most common form of vehicle finance is the traditional instalment sale.
This involves a financier – usually a bank – that lends you the full or partial prices of the vehicle.
You then repay the total amount, as well as fees and interest, over a set term – usually 72 or 84 months.
The bank then holds the title of the vehicle and its registration papers until your final payment is made.
The benefits of this type of financing are that it gives you a clear avenue to ownership, and gives you flexibility in several areas.
These include the ability to choose between a fixed interest rate, or one linked to the Reserve Bank’s rate.
You can also determine the length of your finance upfront to match your unique situation.
However, the downside is that your interest rates could prove expensive, as well as the fact that early trade-ins may end up not yielding as much value as you would like – owing to factors like interest.
Next, Balloon Payment Financing defers a large portion of the purchase price towards the end of the finance term, meaning your monthly instalments are smaller initially.
When it comes time for the balloon payment, this can take the form of paying cash, trading in the car, or refinancing your balloon payment.
This option may appear attractive due to the lower monthly instalments, and like the traditional instalment option, it gives you a clear path to ownership.
However, deferring much of the vehicle’s cost to a balloon payment will make the large final payment much more challenging.
Guaranteed Future Value (GFV) plans involve the financier giving you a guaranteed value that your vehicle will be worth at the end of the term, dependent on mileage and vehicle condition.
As a result, your monthly payments will be based on the difference between the purchase price (plus interest) and the guaranteed future value.
At the end of the term, you can then return the vehicle or refinance the remaining GFV amount.
This option offers convenience to those who want to upgrade their car every few years and don’t want the hassle of selling their car each time.
It is also desirable due to its lower monthly payments.
However, the terms of the deal are often strict, and exceeding limits on mileage and vehicle condition can potentially render the GFV null and void.
Step-Payment Plans are only available from certain banks, and allow buyers to enjoy a lower starting repayment figure that increases over time – hopefully in line with the buyer’s own salary.
This is popular for recent graduates who are on starter salaries that are likely to increase significantly in their first few years.
However, you run the risk of bigger financial challenges in the future if your salary does not increase as you expected.
“As you head to the dealership to take advantage of incredible vehicles, new models and great specials, remember that the finance option you choose is as important as the vehicle you buy,” said Cohen.
“Do your homework, budget within your means, and don’t sign anything until you fully understand the total cost of credit and terms of ownership.”
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