Making Smart Vehicle Financing Choices

South Africans love that ‘new car smell’, with the ownership of a vehicle being one of the country’s prime status symbols. This pursuit of vehicle ownership does come with its drawbacks – especially if you don’t understand what you’re signing up for. If a deal looks too good to be true, interrogating the fine print can go a long way towards mitigating disaster, when ‘unexpected’ terms could come into play.

Measure Your Affordability

Before examining the purchase and leasing options available to South Africans when it comes to purchasing a vehicle, let’s consider some of the cost implications of car ownership. When doing calculations, many people push to afford the ‘nicest’ vehicle they can, without taking into account the day-to-day costs of actually running it. The instalment amount can easily seem affordable when not considering additional costs like insurance, petrol and maintenance (tyres etc). The general rule is that the instalment cost is generally doubled by these additional expenses – so decide whether you can afford that number, not the one on the basic finance calculator.

Save with a Deposit

Saving for a deposit can also make a big difference to how you buy your car. The bigger the deposit, the smaller the capital balance you’ll need to finance through the bank – which brings down monthly repayments and could even lead to a better interest rate. A deposit reduces the capital cost of the vehicle, meaning you have to borrow less, making it more affordable.

Beware Compound Interest

Examine a fixed interest rate vs a linked one. When buying with a linked interest rate, you’re subject to the market conditions and your monthly repayments could decrease if the interest rate drops – but they’ll also increase if the rate rises.

Fixing a rate for the duration of the term generally comes at a 0.5% to 1% premium over the existing interest rate – a benefit if the rate rises significantly over the repayment period, but it could also leave you frustrated (and paying a significant premium) if the interest rate drops substantially during that period.

Use your credit score to your advantage

When making a finance application for a vehicle, credit providers will quote an interest rate at which they are prepared to offer the finance at. This can sometimes be negotiated, especially if you have an excellent credit score, where a 1% decrease can save hundreds and even thousands of rands a month on your instalment amount. Access your TransUnion Credit Report and Score, to know where you stand.

Tackle the Term

Consider the terms of the deal. Generally, vehicle purchase agreements run for 60 months. It is sometimes possible to decrease that period or increase it to as much as 72 months. Increasing the period could make the deal look more attractive because it lowers the monthly repayment amount – but it means that you’re paying an additional 12 months of interest. Reducing the payment period reduces the amount of interest you’ll pay, but your monthly repayments will be higher.

There are plenty of deals out there as manufacturers continually work to make offers more attractive – some good, and others less so. But keeping an eye on the basic components like up-front amounts, term and interest rate – and then deciding if you can afford the total monthly costs including insurance and maintenance – can help you make a smart purchasing decision.