EXPLAINED | Car finance options

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Image: Imperial Auto
Image: Imperial Auto

Many South Africans need access to finance when purchasing a car.  

There are several different types of finance options available to buyers that fit certain needs. 

From balloon payments to installment finance, we provide the answers to help understand the differences and make better informed decisions. 

It's a sad indictment on our public transport system that many South African aren't able to rely on it. Therefore, private car ownership has soared since the dawn of democracy.  

But how do people afford to buy a new or used car? Well, for the majority of South African drivers cannot afford to buy their cars outright and rely on banks to loan them the money. These loans can be difficult to understand for buyers. There are a few different options when it comes to the way vehicles are financed, so how do you know which one is best for you?

First National Bank's vehicle finance arm, WesBank, has outlined the three main choices available to car buyers when applying for vehicle finance, to help buyers understand the differences and make better informed decisions.

"Uncertainties about the economy and the stability of personal incomes mean household budgets are tight at the moment and many South Africans are choosing to pinch pennies," says Ghana Msibi, CEO of WesBank Motor Division.

Volkswagen Polo Vivo Mswenko
2020 Volkswagen Polo Vivo Mswenko (MotorPress)

Balloon payment

This is a convenient solution designed to assist the buyer with cash flow at the start of a finance agreement. A portion of the purchase price is set aside in order to lower monthly repayments, but it's important to remember this deferred amount will still be owed to the bank at the end of the contract term.

Balloon payments require discipline to be used effectively, and customers opting for this arrangement should make sure they're saving enough cash every month to settle the debt once the installment period is complete.

online car buying
Online car buying experience (Supplied by NADA)

It is important to think of a balloon payment as a deposit, but one that's put down at the end of the contract term instead of at the beginning.

Depending on the size of the balloon, the money saved on the monthly payments should more than cover the cost of interest for a loan to refinance the lump sum of debt at the end of the term.

In other words, saving the money yourself while driving the financed vehicle could be cheaper than it would be to apply for another bank loan to pay off the outstanding debt owing on the car, says the organisation.

"While the benefits that come with keeping monthly costs down may be extremely appetising, it is important not to view a balloon deal as a way to get into a car you simply cannot afford," says Msibi.

"A looming lump sum after years of driving a vehicle is easy to ignore and forget, but settling that debt is ultimately the responsibility of the buyer. That said, a balloon payment has some great advantages if used properly," Msibi concludes. 

Guaranteed future value

Guaranteed future value, better known as GFV, is a form of finance suitable for drivers more focused on vehicle 'usership' than 'ownership'.

GFV offers customers a clear indication of the future monetary value of their car to make planning ahead easier, but it does come with some mileage and maintenance restrictions, which need to be adhered to. Wesbank says GFV is best suited to customers who stick to a regular driving routine and have a good grip on the distances they drive annually.

At the onset of a GFV deal, the customer and the bank will agree on maximum distances to be traveled with the financed vehicle over the term (usually three to four years), as well as some guidelines about acceptable wear and tear. 

At the end of the pre-determined contract term, GFV customers have three choices: they can either enter into another GFV deal and drive away in a new vehicle, settle the outstanding balance to own the vehicle, or simply return the vehicle to a respective dealership and walk away.

Buyers must be aware that there may be penalties if the vehicle has exceeded the allotted mileage and/or been returned in an unacceptable condition.

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Installment finance

This form of finance is the most popular and thankfully the simplest of the vehicle finance options. The buyer's monthly repayments are calculated on the purchase price of a car, and payment terms can be structured into time frames of between one and six years. The longer the term, the lower the monthly installment will be, but it's important to remember that interest will increase proportionally to the length of the contract.

As such, the total amount repaid to the bank will be more for a longer loan period than a shorter one, Wesbank says. 

"Instalment finance agreements come with fewer restrictions such as mileage and the condition of the vehicle, but monthly repayments will naturally be a bit more. The extra monthly cost does, however, pay off in the long run because once the payment term is concluded, the customer owns the car outright," explains Msibi.

"One of the most important pieces of advice WesBank has for customers, regardless of which of the three finance options is chosen, is to begin with a healthy deposit. Any money put down upfront will automatically mean lower monthly instalments and less interest, combined with a lower outstanding balance at the end of the contract in the case of balloon payments or GFV deals," Msibi concludes. 

The best advice for buyers is to save a deposit for the vehicle, even if it's 10% of the purchase price. In the long run it will benefit your cash flow. 

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