Have you found your dream car but don’t have access to large sums of money to purchase it? One option is to apply for vehicle finance.
Vehicle finance plans allow you to pay for your new set of wheels in monthly instalments instead of a once-off lump sum. If you are not clued up about car financing, however, then you may be in for a bumpy ride. Let Money Expert provide you with the information you will need so that you can find the right financing solutions to suit your lifestyle.
To purchase vehicle finance in South Africa, you need to be over the age of 18. You will also need to have a good credit score to prove that you pay your bills promptly and dutifully.
Then, the very first step towards applying for vehicle finance is to know how much you can afford to repay each month. You will need to take your net monthly income and then deduct your monthly expenses to arrive at a realistic figure.
Next, you will need to start shopping – both for a vehicle that will suit your budget as well as for a vehicle financing plan that will best suit your lifestyle and requirements. When comparing financing quotes, you want to consider the interest rates, the loan periods, and the type of vehicle financing plan that’s being offered.
Types of Vehicle Finance – Your Options
Once you know how much you can afford and you have your heart set on the perfect vehicle, then its time to apply for finance. Most dealerships will put you into contact with financial institutions that offer financing options. We do, however, suggest that you do your own research and compare offers so that you get the best instalment rate.
In South Africa, most vehicle financing plans are divided into the following three categories:
Hire Purchase Agreements
Hire purchase agreements (or HP agreements) are the most common option for car payments. They are offered by banks and private financiers. When you sign up for this type of vehicle finance, you, as the buyer, agree to pay back the balance owed to the lender in regular monthly instalments over an agreed period of time. Until the finance has been paid back in full (with interest) the vehicle is owned by the lender.
The advantages of a hire purchase agreement:
- You will own the vehicle once you have paid all of the instalments
- The interest rates are lower compared to other types of vehicle finance agreements
- The monthly instalments are fixed, so you will always now how much you need to pay
- Should you wish to pay off the outstanding balance of the loan before the end of the agreed period, then an early settlement will apply
Residual Purchase Agreements
A residual purchase agreement works similar to an HP agreement but with one big difference. Once you have paid your monthly instalments for the agreed upon set period, there will be one final larger payment to be made at the end of the term. This payment is commonly referred to as a “balloon” payment.
Balloon payments help to reduce the monthly instalment fees of a vehicle. When this payment is made, then you will own the vehicle that’s being financed. You may also be given the option to refinance this balloon payment or you can give the vehicle back to the bank or lender (after you have made all the monthly instalments). If you choose the latter option, then you will not be liable for any further payments.
The advantages of a residual purchase agreement:
- Because of the balloon payment that’s due at the end of the agreement term, the monthly instalments on this type of finance agreement are generally lower
- You have more options on how you would like to continue with your agreement once it comes to an end, i.e. you can keep the vehicle or you can give it back to the lender and forgo the balloon payment (this option may be subject to mileage conditions).
If you find yourself in a situation where you have already taken out a loan for a car but come to realise that is wasn’t negotiated on the best terms, then vehicle refinancing may be a good option. Vehicle refinancing enables you to pay off a current car loan with a new renegotiated loan. Your current car loan and title are transferred to a new lender and you will make your monthly car loan payments to this new lender.
There are two things that may determine whether a deposit will be required for vehicle financing; your financial situation and the terms of the agreement made by the lender. In most cases, a deposit is not required. It is, however, advisable to put down a deposit so that the loan amount is less and the payable monthly instalments are reduced.