Vehicle financing: 3 options explained


Most people don't have the cash to buy a vehicle without financing: first you must establish whether you can afford it.

Maybe you have a deposit to put down. Then you have to decide how to finance the vehicle.  

There are three options when it comes to financing a car and each has advantages and disadvantages, depending on what you are looking for.

Kriben Reddy, head of auto information solutions at TransUnion Africa, provides some guidelines:

Instalment sale

Not all deals are created equal. The important thing to remember is that you can lower your monthly premium by taking a balloon payment at the end of the term or taking a longer repayment term – but this will cost you more in the long run.

Paying off a R200 000 car in the shortest amount of time, with a deposit, could save you more than R60 000 over 6 years – over 30% of the purchase price of the car.

The upside:

  • It's all yours when you make that last payment.
  • No limitations to vehicle use.

The downside:

  • Depreciation. A car's value starts dropping the moment you drive it away from the dealership. It's not an asset.
  • Hassle. It's up to you to dispose of it or sell it when you want to trade up.
  • Maintenance and insurance. Because it's yours, the responsibility of insuring and servicing it is yours too.
  • Balloon payments. If there's a balloon payment, you'll have to come up with a big chunk of money – or refinance the amount, which can get you caught up in a debt spiral.

Full maintenance lease

Another type of financing is taking on a full maintenance lease (FML). With an FML, you rent the vehicle for an agreed period. You pay a monthly fee, which covers all maintenance costs - including services, and those items that need to be regularly replaced because they wear out.

At the end of the term, you hand back the car and, provided you've stuck to the terms of the agreement, you get a new one.

The upside:

  • The monthly repayments are often lower on an FML than on an instalment sale.
  • You get a new vehicle more often.
  • No hassles around getting a trade-in on your old car or having to sell it privately.
  • No nasty surprises at the end of the term with balloon payments.

The downside:

  • Even though you pay for it every month, you won't ever own the vehicle.
  • You aren't able to go on long road-trips. There are strict limits on the maximum number of kilometres allowed, with severe penalties for exceeding them.
  • There is a penalty to get out of the contract early.

Guaranteed buy-back

A "guaranteed buy-back" is where the bank and buyer agree on a value that the car can be "bought back" for at the end of an agreed payment period.

The upside:

  • You can possibly end up paying lower monthly payments than an instalment sale.
  • You can shorten the period of ownership – which again means a new car more often.

The downside:

  • Like the FML route, deals like this come with strict terms around the upkeep and mileage of the car, and you could be subject to penalties if these conditions aren't met.
  • You pay insurance for the car.
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