A car is a depreciating asset and will lose value immediately when you leave the dealership. It becomes very important to take into the consideration the way you will be financing your car. Some finance options leave you upside down, that is when the market value of your car is less than what you owe the bank. Here is the best way to finance a car in South Africa.
1. Take the shortest term
A lot of people tend to finance their cars for 5 years, some even finance them for 7 years. This is not the best way to go about it, car loans with a period of 5 years usually cost more in the long run. You end up paying way more interest than you would if you were only financing for 3 years.
A car depreciates very fast and will lose the majority of its value in 5 years. Financing it for 3 years allows you to build up equity faster, you will benefit a lot should you need to sell it or do a trade-in. You can also use it as collateral when you are applying for other types of loans like personal loans. It will still be worth a lot in 3 years and there are a number of ways you can use this to your advantage.
2. Build up a good credit record
Don’t make the mistake of applying for a car loan with no credit record, or worse; a bad one. The interest rates they will charge you are ridiculous and will leave you upside down. A person with an excellent credit record can pay just an interest of 4% while a person with a bad credit record or no record at all can pay around 14% interest when financing a new vehicle.
Building up a good credit record doesn’t take much time, if you have no credit history at all then spend at least 3 – 6 months building your credit record. Banks will lower your interest rate significantly if they trust that you will pay back their money.
3. Don’t do balloon payments
A significant portion of your instalment is set aside when you are financing with a balloon payment. You will pay this money as a lump sum at the end of the period. This means that you will pay a low premium and interest rate during the period but problems will arise should you not have the lump sum needed at the end of the period. This money may be more than R100 000. You will be forced to take a personal loan or do other means to raise it or lose the car entirely.
4. Shop around for interest
Don’t blindly use your bank without considering other options, shop around for the best interest rate from all vehicle financers. Take the one that offers you the best interest, you can negotiate to bring your interest down a bit in most cases.
Don’t contribute more than is necessary for the car deposit. If you happen to have R100 000 on cash and are looking to finance a R300 000 car and the bank asks you for a deposit of R50 000 give them the R50 000. Don’t immediately put the R100 000 upfront. There is a reason why cheaper short-term loans have such a high interest rate (over 20%) while a mortgage loan has an interest rate around 11% on average.
This is because the bank makes a lot more money on interest on a larger amount of money. 11% of R1million is not the same as 11% of R500. Banks usually charge a lower interest when you have more money on a loan. You can use the other R50 000 later on as a capital deduction, this won’t affect your interest rate but it means you will pay interest on a reduced amount of money.
Conclusion
This was a guide on how to best finance a car in South Africa. Do you have any thoughts or questions? Comment below.
