23 Aug Car Finance
What is car finance?
Car finance is a direct loan from the bank, a financial institution, or a car dealership which is secured against the car you plan to buy. The car serves as collateral for the loan, which you agree to repay in fixed monthly instalments.
Where to start?
Be honest about how much you can realistically afford. Consider the deposit amount or the balloon payment (lump sum payment that is due at the end of a finance period), and the amount you’ll be paying each month (including insurance, your car security system, petrol, etc.). An online finance calculator is a quick and easy way to get an estimate of what you can afford.
Requirements for car finance
Banks, financial institutions and car dealerships each have their own specific list of requirements for car finance, but the majority require you to:
- Be over the age of 18
- Be a South African citizen or a permanent resident
- Have a valid drivers licence
- Be permanently employed
- Be contactable on a landline
- Have a clear credit record
- Earn a minimum of R5000 per month
- Have your salary deposited electronically into your bank account
An interest rate is the cost of borrowing money – or the income earned from lending money. Interest rates for car finance are personalised; the final rate is based on your current risk profile and is decided by the bank – even if you are applying through a car dealership.
If you own property, have savings, or you are married, you pose less of a risk to the bank and your interest rate may be lower. However, if you have missed payments in the past – even if you’ve paid all your outstanding debt – you may be given a higher interest rate as the bank will consider you a financial risk.
Deposit or balloon payment?
Paying a deposit (usually between 10% and 30% of the total vehicle cost) at the start of your loan agreement cuts down the amount on your monthly repayment and the interest rate.
A balloon payment (also known as a residual) is a large payment that needs to be paid at the end of the finance period. This lowers your monthly repayment, but attracts more interest – therefore, it should only be considered if absolutely necessary.
Insurance and legalities
Every financed car needs to be insured. The brand and model of your car, your accident record, and your age all play a part in how much you’ll pay for car insurance each month.
If you are a first-time buyer, you may need to provide surety – a parent or blood relative can stand surety on your behalf. Always insist that the car you are buying comes with a warranty.
In summary; before signing your car finance contract:
- Know your budget
- Decide what type of car you need
- Ask all the necessary questions
- Be wary of emotional buying
- Get approved for car finance
- Ensure that the car dealership is a member of the Retail Motor Industry (RMI) or Independent Dealer Association (IDA) – insist on proof of membership
- Read all the fine print and understand the terms of the loan
- Go for a test drive
Things to consider before signing on the dotted line
Make sure that:
- you have shopped around – be confident that you are getting the most affordable loan; don’t just accept the first loan offered to you by your bank.
- you have read all the fine print and understand the terms of the loan.
- you are getting a fixed interest rate that won’t go up before the end of your repayment term.
- you are allowed to pay off your debt faster without paying penalties.
- you understand the other products the lender tries to sell to you, e.g. insurance to cover you should you get into an accident before paying back the loan. Be wary of lenders who set the purchase of additional products as a condition for the loan.
- you really need the loan in the first place. Wouldn’t it be better to cut back on your spending and save the money you need?