Vehicle financing options explained
Buying a car should be an exciting time in your life, especially if it’s your first one, however, it can involve a long and complicated process and requires a large financial outlay. This can seem daunting at first and working out how you’re going to afford that car you’ve always wanted without being lumbered with huge debt can be frustrating. Car buyers should not worry however, as there are a variety of cheap car finance options available but making sure you choose the right one for your needs and finances is important.
In this guide we’ll walk you through the difference vehicle financing options available to you, as well as looking at the pros and cons of each option.
In This Guide:
- Hire purchase agreement
- Residual purchase agreement
- No deposit vehicle finance
- Bank loan
- How to find the best vehicle finance option for you
Hire purchase agreement
Hire purchase agreements are contracts between a buyer and a bank or lender. These enable the buyer to purchase something through borrowing money from a bank. This loan is then repaid by the buyer in monthly instalments over an agreed period. When purchasing a vehicle through these agreements your only immediate cost will be the deposit fee, usually around 10% of the value of the vehicle. Until the final payment has been made you won’t legally own the vehicle.
The benefit of this agreement is that it allows you to get a cheap car loan even with a low credit score, as the car will serve as collateral for the loan.
Residual purchase agreement
A residual purchase agreement is a loan with a bank or lender paid back over an agreed period in a series of monthly instalments with a large payment required at the end of the period to gain legal ownership of the vehicle, known as a ‘balloon payment’. When the final payment deadline approaches you have the option to purchase the car by making the ‘balloon’ payment, hand the car back to the dealer, or sign up to a new RPA for the purchase of a new car.
The flexible nature of these agreements is attractive to many car buyers, particularly those who like to regularly change or upgrade their vehicle.
No deposit vehicle finance
Most vehicle finance options will require you to pay a deposit on the car you wish to buy, but if you don’t have spare cash available for what may be an expensive deposit payment, there are still options available. A no deposit vehicle finance scheme allows you to borrow enough money to pay for your vehicle without making the deposits. This does usually mean your monthly instalments will be higher, as will be the interest rates. However, it does mean whatever your financial situation you can be driving a new vehicle in no time.
These car finance deals cater for customers with all types of credit score but will often require you to be earning a certain amount, usually around at least R6,500 per month.
Leasing offers you the option to rent a car for an extended period. You’ll usually have to make monthly payments to keep the car and there will be restrictions on mileage and any modifications to the car you may wish to make. When leasing there is no option to purchase the car through a final larger payment.
This is an attractive option for someone who needs a car for a set period but wants to avoid the large financial outlay involved in the purchase of a car
A regular bank loan would allow you to get a car you might not have the immediate funds for very quickly. If you purchase a car through a bank loan you will still legally own the car right away and you will have the option to sell it and upgrade to a new vehicle any time. To get a bank loan you will need to have a good credit score.
Vehicle refinancing is an option for those already signed up to an agreement to pay for their car but may want to alter it due to a change in financial circumstance or to help better manage cash flow. Under vehicle refinancing schemes the customer receives the finance for the outstanding balance owed on the vehicle and then spread these costs over a longer period. For instance, if you still owe R30,000 on a deal set to end in the next year, but don’t think you will be able to repay that money in time, you can use a refinancing scheme to cover that initial payment and then spread your outstanding costs over a 3-5 year period.
This option enables those with changing finances to keep their vehicle and pay less each month on vehicle repayments, freeing up money to be spent elsewhere.
How to find the best vehicle finance option for you
With so many cheap finance options out there, it may be hard picking the one most suited to your needs. To find the best vehicle finance deal for your needs, use our price comparison checker here which will find the best option depending on your financial situation and the car you wish to purchase.