Other than property, a car is probably the most expensive thing you’ll ever buy. It’s a bit of a problem if you need one (and many of us do) but don’t have the money available. Generally, it’s better to put off a purchase until you have the cash, but if you absolutely need a car and don’t have the money, you could take the vehicle finance route. Here, we talk about what to consider when buying a car and take a look at what vehicle finance actually entails.

What to consider when buying a car

When purchasing a car, you should know the model and year of the car, check the mileage and the condition of the vehicle, particularly when looking into buying a used vehicle.

If you’re buying a second-hand vehicle, it’s important to know the value of the car before committing to paying the price advertised. You can access that information and check the history of the vehicle by requesting a valuation. The next step is to sort out finance and insurance paperwork. If you are buying from a dealership and using vehicle finance for the purchase, you won’t be able to take the car without proof of insurance.

Lastly, check your affordability before choosing a vehicle. Compare your total monthly expenses with your take home income and be honest about how much you can afford to spend paying off a vehicle loan. You’ll also need to factor in other vehicle-related expenses like insurance and services.

What are my payment options?

Choosing the best repayment options depends on your plans for the car. Do you want to own it? Do you want to lease it? Are you planning on changing cars every few years?

You can pay cash for the car, which saves you from paying a hefty amount on interest, meaning that the car will cost you less.

If you choose to lease a car, this agreement gives you the right to use the vehicle as your own without owning it. Ownership rests with the credit provider and you only have temporary possession of the car. Payment for the possession and use of the car is made on an agreed or determined periodic basis during the life of the agreement. Interest fees and charges are payable to the credit provider in respect of the agreement.

Taking out a loan to finance your car is the most common option for car payments and is usually provided by means of vehicle financing from a bank. This option allows you to pay on a monthly basis for up to 6 years (72 months) but the longer the time frame, the more interest you pay. You can apply for vehicle financing with or without a deposit.

If you take out a loan to finance a vehicle, you need to consider the following factors and how they affect affordability and the overall cost of a loan.

Interest Rates

If there’s one thing you need to understand fully when it comes to vehicle financing, it’s the interest rate. It determines the total amount you’ll pay for your car at the end of your contract. There are two forms of interest when it comes to vehicle finance: fixed and linked.

A fixed rate

A fixed interest rate, as the term suggests, remains exactly the same throughout the duration of the vehicle financing contract, with no chance of it fluctuating. While this means that your loan’s interest rate can’t ever go down, the converse is true as well. With a fixed interest rate, you’re protected against volatile interest rates, which could lead to your interest rate soaring. From a monthly repayment standpoint, it also makes it a lot easier to budget and know exactly what will be required of you every month for the duration of the contract.

A linked rate

If the fixed rate doesn’t appeal to you, the other option you have is a linked interest rate. These rates are linked to the prime lending rate of a country. The great news is that if the prime lending rate drops, so too will your monthly instalment. The bad news is that should the prime lending rate increase, your monthly instalments will increase with it. At the end of the day, the right option for you will be determined by the flexibility you have within your budget.

Loan Term

A vehicle financing contract will be valid for a predetermined period of time, typically between 12 and 72 months, over which you’ll prepay the money loaned to you, with interest and fees. While it may be tempting to pay back as little as possible every month, it’s important to know that such an approach could end up costing you far more than if you’d gone with higher monthly instalments and a shorter repayment period.

It also means that it will take you a long time to get your settlement value to match its trade-in value, which means if you were to sell the vehicle, you may only just cover the cost of the loan. The best thing to do is pay as much as you can each month and opt for the shortest repayment period possible.

Balloon Payments

“Balloon payment” is the term given to the amount of your loan that still needs to be paid at the end of the loan repayment period. This final instalment is usually paid as a lump sum. Balloon payments are designed to bring the monthly instalments down, but they also increase the amount of interest paid over the life of a loan. If necessary, the balloon payment can be refinanced if you’re not able to pay it as a lump sum, though this would only increase the cost of your loan. If you aren’t able to pay this back, you’d risk having your car repossessed.

How to apply for vehicle finance

The whole process might not be as complicated as you’ve been led to believe, but it helps to know in advance how it all works.

1. Vehicle research

Before you apply for finance, it’s important to make sure you do your research on vehicles and deals as this can reduce the size of the loan you need. Perhaps the car you have in mind is on special at a particular dealership, maybe there’s a demo model available, allowing you to get a good price on a car that’s practically brand new. Or maybe it makes more sense for you to buy a second-hand car.

2. Prepare your documents

The main documentation you’ll need includes your valid driver’s licence, your South African ID, three months’ worth of bank statements, your last three payslips and a proof of residence that’s less than three months old.

3. Submit application

Before you sign on the dotted line, you can always discuss any lingering concerns or questions you may have with the Finance and Insurance representative (F&I) at the dealership. Accredited by FAIS, they’re there to give you objective advice, in fact, they are legally obliged to do so. Your application should also be sent to all vehicle finance providers, so you’re presented with the best possible options—you don’t have to use the preferred finance provider of the dealership (even if they have one in-house).

4. Accept an offer

Once your application is sent off, the vehicle finance providers will then put forward their offers on what they’re willing to finance you, as well as the repayment term you’ve been approved for. You don’t have to take the first deal that’s sent to you. In fact, it’s advised that you wait until you see all options and that you ask the F&I to negotiate the rate you are offered. Lenders will offer you an interest rate based largely on your credit score.

Need to check your credit score?

CreditView a tool powered by TransUnion) is a quick and easy way to check your credit score. It's also free! A quick registration process is all you need to complete in order to use this useful tool.

You can also check your credit score through Old Mutual Rewards. If you are already a member sign in here or join by registering here.