Find out what you can afford
It’s always a good idea to revisit your monthly budget, especially when making a big commitment such as financing a vehicle. Most major banks will offer affordability calculators below, which are free and easy to use. They will help you work out exactly how much you want (or should!) spend on car instalments. Remember the common rule of thumb for running costs – whatever your car repayment is, you’ll need double that for fuel, repairs, etc. So, for example, if you budget R4 000 for a monthly instalment, keep another R4 000 aside for running costs.
The bigger the deposit (cash amount) you put down, the smaller the risk for the finance institution. This means a smaller monthly repayment and a lower interest rate.
Interest rates: fixed or linked?
An interest rate determines how much interest you will pay on your car loan. You typically have two options:
Fixed rate: Like the name suggests, there are no surprises here. For the duration of your agreement, you will be charged the same agreed-upon interest rate and your monthly instalment will stay exactly the same. In other words, you know exactly what you’re in for.
Linked rate: This rate is linked to the prime lending rate of South Africa; currently 10.5% as of 18 March 2016. When it increases, so will your instalment but if it decreases, you will pay less. This option is a bit more risky so be sure to have some spare cash in hand should the interest rate rise.
Whichever rate you choose, make sure that you get the lowest possible rate.
The term of your agreement
Another important factor in how much you pay every month is the period of time over which you will pay back your loan. This could be a minimum of 12 months or up to 72 months. The longer your vehicle finance term is, the smaller your monthly instalments will be. However, a longer term also means a higher interest rate so you’ll end up paying more and for longer.
Understanding residuals (balloon payments)
A popular tactic used by dealerships to make car payments more affordable is to offer buyers a residual or balloon payment. This is where a percentage of the vehicle value is taken off the finance amount and is payable as a lump sum final instalment at the end of the finance period.
So if you buy a car worth R500 000, a residual amount of R100 000 is owed at a later stage and you only pay off R400 000, which means lower monthly instalments. At the end of your finance term, you then owe R100 000. It is possible to get this ‘balloon payment’ refinanced but, just in case you can’t afford to pay it, it’s a good idea to take out insurance against non-payment. Some insurers also offer shortfall insurance cover should your vehicle be written off in an accident and you have to pay back the remaining loan amount.
Finding the best deal
Once you know what you can afford and have an idea of the terms and rates you would like, you can either shop around for the best deal yourself, or speak to the Finance & Insurance representative (F&I) at the dealership. He/she will be FAIS-accredited and is legally required to give you unbiased advice. Take along your ID document, valid driver’s licence, last three payslips or three months’ bank statements and a proof of residence not older than three months.
Once your application has been approved, a finance provider will communicate what interest rate and payment period they are willing to offer. Always see if you can negotiate a slightly better deal – there is no harm in asking!