Not many of us can afford to buy a car with cash, and we need to explore other avenues so that we can live the dream of having our own transport. One of these solutions is going to a bank or other financial institution and applying for a special loan, called ‘car finance’. While this isn’t necessarily the most complicated process, it can be confusing to know if this is the right route for you.
Simply, you need to understand how this process works, what the different terms mean, and what your options are when it comes to interest rates and balloon payments so that you’ll be able to confidently set off on the adventure that is buying your new car.
Approaching the bank.
Before you head to the bank, you’ll need to decide what you can afford and which car you’d like to buy. Once you’ve finalised these details, you can approach a bank (or several banks) to apply for car finance. If you’re buying a car through a dealership, their finance and insurance (F&I) representative may handle the application process on your behalf.
Whichever way you decide to go, once you’ve applied and been approved, the finance provider will communicate the interest rate and payment period they’re willing to offer. This is the legal nitty gritty that you need to understand.
In human language, the terms of your finance agreement set out all the details of your loan, including how much you’ll pay every month and for how long, which could be between 12 and 72 months.
It’s good to know that a longer finance term means a smaller monthly instalment. However, it also means paying more interest. Essentially, if you take out a lower instalment amount over a longer timeframe, you’ll pay more in the long run. This is something that you need to weigh up when deciding what’s more affordable for your personal circumstances.
An interest rate is the amount that determines how much interest you’ll pay on your car loan. You can usually choose between fixed rates and linked rates.
If you choose a fixed rate, you’ll be charged the same agreed-on interest rate and your monthly instalment will stay the same until your loan is complete. This option means that there’ll be no surprises, which can be comforting in a world where costs keep going up.
However, if you choose a linked rate, then your interest rate is linked to the prime lending rate of South Africa. So, when the interest rate increases, your instalment will also increase… And when it decreases, you’ll pay less. It’s tempting if you consider that your payments could get less, but this option should be examined carefully, perhaps with the advice of a financial advisor.
A balloon payment is also called a ‘residual’ and is a percentage of the car’s value that’s taken off the finance amount. You’ll need to pay this amount as a lump sum at the end of your loan period.
Let’s do the maths… If your car costs R300,000 and the balloon payment is R50,000, then the financial institution will calculate the interest less the balloon payment. In this case, you’ll pay interest on R250,000 instead of R300,000. Not only will your interest be less but your monthly instalments will also be lower.
Wondering what the catch is? Well, you need to remember that you have to pay R50,000 to the financer in a single payment when the loan is finished.
Should I let the dealership handle my vehicle finance?
If you decide to allow an F&I representative from the dealership to help you find the best car finance terms (interest rates and repayment periods), then it’s important that you first check if the rep is FAIS-accredited and is legally required to give you unbiased advice.
You’ll also need to bring your ID, valid driver’s licence, last 3 payslips or 3 months’ bank statements, and a proof of residence not older than 3 months with you to the dealership so that they can process your application as quickly as possible.
The final check is insurance. All financial institutions make it a condition of your loan that you get comprehensive car insurance. That’s where you’ll need to do your homework and compare quotes from top insurers in South Africa beforehand so that you don’t have to make a rushed decision then and there.