Weigh up your financial goals when buying a car

2010-11-20 09:28

I’ve been receiving a number of calls from readers who have been complaining about car purchase contracts.

There appears to be a lot of confusion about hire purchase and lease contracts.

One reader in North West ­entered into a residual contract after paying a 20% deposit and now three years down the line, he realises the folly of his hastily made decision and wants to sell the car and settle.

According to him, the purchase price of the car was R98 000 and he is unhappy that 36 months later and after instalments totalling just under R70 000 the bank tells him the settlement amount is ­­R64 000.

The one thing I noticed is that most of the readers are individuals who went into contracts before the National Credit Act (NCA) came into effect.

One remembers how easy it was to gain credit and how car dealers went on a total onslaught with marketing gimmicks to close business before the act became law.

After the NCA was introduced, in order to get around the issue of affordability, credit terms of 72 months have now become standard.

Car salespeople will, without even asking you, quote on a 72 months repayment term as ­opposed to the traditional 48, 54 and 60 months terms. The longer the term, the lower the instalments.

It is important to note that the residual value remains the same in a lease contract ­whether you pay a deposit or not.

I believe this is where the ­confusion about the balloon payment comes from.

Some assume that if a deposit is paid, they do not have to pay the balloon payment at the end. The only effect of a deposit in a lease contract with residual is to reduce instalments.

What may appear as a saving now is in reality a deferred ­payment that has to be painfully met in the end.

It may be better to take a hire purchase agreement over a ­longer period.

It is possible to get into a longer term contract and later on, when one gets a bonus or a lump sum, make a cash injection and demand a ­recalculation which will then ­reduce ­either the term or the ­repayments.

This arrangement is allowed under the NCA and consumers should take advantage of it and not let the contracts entered ­into to strangle them.

The normal practice and temptation is take the lease route, especially for individuals who receive car allowances.

The reasoning is that every few years they can return the car and get into a new model.

That is fine if they are willing to spend the rest of their working life repaying car loans.

As part of the financial or lifestyle planning process, the ­matter of car buying needs to be explored and weighed up against the individual’s overall financial goals and plans.

» Diale is a financial planner. He can be contacted on 078 775 0802

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