When it comes to buying a new or used vehicle, customers are often confused by different payment terminology. There's more than one way to purchase a car other than outright cash payment and here are three finance options explained.
There are many ways to finance your next vehicle purchase and all of them need to be explained in detail. Often, potential customers are confronted by hard-to-understand words and hidden costs, which casts doubt over the final decision. With budgets becoming even more sensitive, making sure you get the right deal is critical. Here are three of the most commonly-used payment plans and how they work. Armed with this information, you can get your next car without any surprise shocks.
If you're not buying your car cash, then you're going to have to pay it off monthly. A monthly payment amount is decided on and takes into account any deposit or trade-in amount from your current vehicle. The bank will buy the car on your behalf, and you will need to pay the bank back each month, with interest. Generally, you can pay off a car between 12 and 72 months. If you take the longer option, your monthly payment will be lower, however the interest value will add up and your amount total owed to the bank will be high. The best course of action is to try to pay the car off as quickly as possible.
Instalments with a balloon payment
This is very similar to your instalment plan, however, there's a portion of the purchase price that is subtracted resulting in a lower monthly instalment. However, you will need to pay this amount off at the end of the deal. The lower monthly payments will be easier, but the lump sum at the end of the financing deal is usually a shock to many and people go into debt trying to settle the final amount.
Guaranteed future value
GFVs, as they're commonly known, have become quite popular in SA of late, although Europe and the USA have used this method for years. The critical thing here is that a car starts losing value the moment it leaves the dealership and therefore is known as a depreciating asset. GFV works out the value your vehicle will be worth in the future, based on condition, mileage and whether it has been serviced. This amount is then 'guaranteed' at the beginning of the deal.
Generally, GFV contracts last for around 3 years and the customer will know exactly what his/her vehicle will be worth after that period of time. When the time period is up, the customer has three options. Firstly, you can get rid of the car you've been driving and get into another new GFV deal. Secondly, you can pay the final amount and become the legal owner of the car, and finally, you can return the car to the dealership and walk away from any money deals, as long as you've looked after the car, not exceeding the mileage limit agreed and serviced it at authorised centres.
What this means is you're basically paying for the use of the car, much like a rental scheme. It is critical that you are aware of the GFV terms and conditions. If the vehicle has a mileage limit of 25 000 km in two years, do NOT exceed 25 000 km, otherwise, you will be penalised and lose money.
How do I work out these numbers?
Cars.co.za has a smart finance calculator to assist you when it comes to making the numbers work. Our calculator is good for estimates but gives you a good idea if you can afford the vehicle. WesBank, who sponsors the #CarsAwards, also has many financial calculators to help you.