Car finance - Tips to help you save

You may know all about that set of wheels that’s stolen your heart, but if you’re not clued up about car financing, you could well be in for a bumpy ride.

Most consumers select one of the following options: a cash deal; instalment; instalment with balloon (residual) payment, or lease. However, these days you could also consider a guaranteed buy-back deal, and we also provide important information regarding so-called instalment take-overs.

But before you get to decide how you're going to pay for your wheels, if it’s a used car, you need to know that the price is right, and the same applies to what you’re offered as a trade-in on your existing car.

STEP 1 - Know the value of the car

The industry relies largely on the Transunion Auto Dealers Guide to determine the current value of specific vehicles, and you're very much on the back foot if you don't have access to that information.

Luckily there’s a way to get it: R10 will buy you a Transunion Car Value report on a specific vehicle make and model year, which will indicate whether or not your trade-in offer is fair, and whether or not the car you want to buy has been overpriced.

STEP 2 - Verify the car

With respect to the car you’re keen on, it’s well worth spending R99 on a Vehicle Verification Report which reveals the car’s model year (often misrepresented), accident history and more.

STEP 3 - Interrogate the Offer to Purchase document

Once the purchase and/or trade-in price has been agreed, don’t sit back and leave it to the F&I (finance and insurance) manager in a dealership to “sort out” the paperwork for you.

It pays to interrogate every line of the Offer to Purchase document.

  • If you traded in a car, check that the trade-in amount you agreed on has been accurately reflected.
  • The F&I person will do their best to up-sell you a host of add-ons to pad t he deal; products such as paint protection, fabric protection, rust-proofing, dent-and-scratch policy, maintenance plan. If you do really want one or more of those, you’ll probably be able to get a better deal on them yourself.
  • Look for the big add-on, the “delivery/dealership/on the road” fee which is several thousand Rand. Paying extra for number plates, a tank of fuel and for licensing and registration - plus having the dealership deal with the schlep of getting it done - is perfectly justifiable, but anything over that is not; it’s just the industry’s way of bumping up the purchase price of the vehicle. So refuse to pay it, or at least negotiate a substantial reduction.

The Payment Options

Cash

If you don’t have the full purchase price in cash, but you do have “fat” in your home loan, you’ll pay a lot less in interest if you fund the balance out of your home loan.

  • Upside: The car will cost you less, thanks to you being spared paying a whack of interest.
  • Downside: “What discount do I get for cash?” doesn’t work with motor dealerships. They make more money out of you if the deal is financed.
  • Tip: Don’t tell the salesman you intend to pay cash because the dealership might not be as moveable on purchase price if they know upfront that they aren’t going to make any money off you from financing.

Instalment

This is the most common car payment method. You pay off the car in monthly instalments for up to six years (72 months) either with or without a deposit. The longer the term, the more interest you pay. Ideally you should put down a sizeable deposit and structure the loan over the shortest possible time - that way you pay the least interest.

User our Finance Cost calculator to see what you could end up paying per month.

If you get a windfall you can pay off the car early without penalty if your loan is less than R250 000, but a penalty will apply if it’s more than that.

  • Upside: You own the car outright after your last payment of the instalment term, unlike with a balloon payment or lease deal.
  • Downside: Interest adds a whack to the car’s advertised price and if your circumstances change over the five or six years of the finance deal, you could battle or fail to keep up with the payments. If the value of your car has depreciated significantly, selling it or, worse, having it repossessed and auctioned by the bank could leave you without wheels and still owing money to the bank.
  • Tip: Don’t leave it entirely to the F&I to arrange the finance for you, and then focus only on the monthly repayment, without interrogating how many years the deal is structured over or what the interest rate is. Before you go into the dealership to sign the deal, phone around and get your own quote, negotiating the lowest possible interest rate. Then it’s up to the dealer to beat your pre-approved loan quote.

Instalment with Balloon Payment

A balloon payment - also referred to as a residual - is “an agreed inflated final payment of a loan that is paid in full at the end of the loan agreement”. So having paid instalments for five or six years, you still have around 30% of the retail price to pay in a lump sum. You can either choose to refinance the balloon payment, or trade in the car, whereby the balloon payment is then settled and you can enter a new finance agreement. Wesbank's Rudolf Mahoney says that, "there is no set value for balloon amounts and they differ from every make and model. A very popular car such as a Polo can even be done on a 50 % balloon. It's all about supply and demand dynamics," he says.

Use our Finance Cost calculator to see what you could end up paying per month.

  • Upside: You get to drive a car you can’t really afford.
  • Downside: You get to drive a car you can’t really afford. After paying that instalment for all those years, the car is still not yours - that big amount which was carved off to lower your instalment to something you could afford, is now due. A lot can happen in five or six years - you could not longer qualify for credit when your balloon payment is due, in which case you'd be forced to sell or trade-in the car to pay that big residual amount still owing.
  • Tip: This is really not a good car financing option. If it’s the only way you can afford to finance a car, you can’t afford it: rather opt for something cheaper.

Lease

Almost a third of new cars in the US are leased, but leasing remains a relatively new concept in South Africa. The lease agreement gives you the right to use the vehicle as your own, without actually owning it.

  • Upside: You can drive a new car every two to four years and enjoy the benefits of a latest model’s improved fuel economy, performance and technological enhancements. When the lease expires you don’t have to worry about selling or trading in the car - or settling any outstanding money owed to your bank. Monthly repayments are more affordable, and there are no service and maintenance costs, these being covered by the service and maintenance contracts.
  • Downside: You don’t get to pay off the car and own it, opting to keep it and enjoy not having the financial burden of a monthly repayment.
  • Tip: Lease agreements have strict limitations and penalties if you fail to get the car serviced at the specified intervals, repaired by approved repairers and if you don’t adhere to the mileage limits.

Guaranteed Buy-Backs

These tend to be structured at 36-month terms with 60% residual value. At 36 months, provided you have...

  • a) kept within your annual mileage limits (usually 15 000 to 20 000 kilometers per year);
  • b) honoured your service and insurance commitments;
  • c) not damaged the vehicle; and
  • d) agreed to replace your car with a car from the same manufacturer (this is a common condition)

… the car manufacturer guarantees to pay you the full value of the 60% owing under the lease or rental or installment-sale agreement.

  • Upside: You get a new car every three years at similar instalment.
  • Downside: You get locked into one manufacturer and need to stick to the commitments listed above. Those who don’t read the small print could unwittingly breach the contract.
  • Tip: Not advisable for higher-mileage drivers.

Instalment Take-Overs

The National Credit Act does not allow a person to simply take over someone else's debt without a proper credit assessment and financial health check. In other words, it’s illegal. "MFC/Nedbank doesn't condone it or knowingly allow it without cancellation of existing contract and re-entering a new one with the new finance applicant,” said MFC managing executive Trevor Browse. Similarly, Rudolf Mahoney, Wesbank Marketing’s head of brand and communications, warned that take-overs are a really bad idea. “A client will be in breach of his finance contract if he participates in such a scheme,” he said. "The person who is interested in taking over the car must settle the finance deal, either by means of a private vehicle finance deal or in cash. The bank will then release the eNatis documents.

"In my experience, these are usually scamsters operating in the classified pages. Usually these cars disappear over the borders. Worst of all is that the insurance companies normally do not pay out claims where the car was voluntarily handed over to a third party, so the client is left paying for a car.”

  • Upside: It’s a way for someone with a bad credit score to pay off a car. Can work within a close family set-up.
  • Downside: It’s illegal. And it’s extremely high risk to allow someone else to pay your instalments, because if the person who takes over the instalments reneges, you will still contractually bound to pay the bank. For the person who takes over the lease, the “seller” could decide they want their car back, resulting in a messy dispute.