Very few people can afford to pay cash for a new car nowadays, especially in cash-strapped South Africa, necessitating credit facilities and loan agreements.
Navigating the different options to pay for a car can be nearly as time-consuming and complex as choosing which car to buy in the first place.
Understanding how each option works and how each will affect your finances long-term is crucial and can help ensure financial wellness when buying a new car.
The most straightforward purchase agreement is a full-price cash offer, avoiding the need for any credit facility and saving significantly on long-term interest charges.
While it may be difficult to make it through the month after putting away a large portion of your income, not to mention the discipline to do so, a cash purchase represents the least complex payment method.
Brandon Cohen, Chairperson of the National Automobile Dealers’ Association (NADA), explains that this method ensures immediate and full ownership of the vehicle.
“While often feasible in the pre-owned market, the higher price point of new cars makes a cash purchase less attainable for most buyers,” he notes.
“Furthermore, it can significantly impact personal financial liquidity as well as reduce monthly interest income for those with invested savings.”
Another way for buyers to secure their money ahead of a potential purchase is through pre-approved bank financing.
This way, the buyer secures a loan directly from the bank before visiting a dealership, providing the peace of mind that comes with knowing the exact budget and eliminating the risk of a declined application.
Cohen explains that this method does, however, require some financial expertise and time that most first-time car buyers might not possess.
“Most buyers may find it taxing to approach multiple institutions individually to compare offers, potentially missing out on more competitive rates,” he says.
The easy route
The most commonly chosen option when buying a car in South Africa is using dealer-arranged financing.
Car dealers employ Finance and Insurance (F&I) managers to facilitate loans and credit agreements, acting as a middleman between the buyer and multiple lending institutions to find the best deal.
F&I managers can request quotes from multiple banks simultaneously, allowing buyers to compare interest rates and deal structures with ease.
This includes choosing between fixed and linked interest rates, deposits and balloon payments, and even guaranteed future value (GFV) deals.
“The added benefit of dealer finance is that deals can be tailored to most budgets,” says Cohen.
“Choosing how to pay for a vehicle is a significant financial commitment and therefore requires careful consideration of one’s unique circumstances.”
He explains that modern dealerships act as a hub of financial expertise, with experienced F&I professionals who know how to navigate the variety of options available to car buyers.
These include non-traditional buying models, such as rent-to-own agreements, vehicle subscriptions, or leasing agreements.
Cohen notes that this ensures most clients are able to find a structure that suits their personal lifestyle and budget.
Even with these structures in place, financial experts recommend that you do not spend more than 20% of your gross monthly salary on vehicle payments.
Extra ownership costs like insurance, maintenance, and daily running costs also contribute to monthly car expenditure.
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