Smart guide to car finance

Owning your first car is an exciting milestone that brings with it independence and freedom. However, buying a car can be a daunting prospect for many who have never been through the process. From unfamiliar terms and a seemingly unlimited number of car choices, to interest rates and balloon payments - one can be left feeling very much in the dark as to where to start or what to ask. Here's a beginner's guide to all the finance basics you need to consider to make the most informed, and hopefully exciting, decision.

Financial Planning

Many of us will know that with the decision to buy a car comes great financial responsibility. But, having some disposable income doesn’t necessarily mean you are financially stable enough to cover everything that comes with owning a car. According to Wesbank, the majority of South African car buyers will be applying for a loan to finance the purchase, meaning you will need to factor in how much you can comfortably afford in monthly payments.

Just because you have R4000,00 left as disposable income every month for example, doesn’t mean you can afford the same amount in repayments. The best way to figure out how much you could potentially afford is to deduct all your expenses from your salary, then deduct the potential car repayment, moving higher and lower until enough of your disposable income is left to cater for emergencies or unexpected expenses.

Understand all the costs involved

While the actual amount of the car is an overpowering thought, there are a number of additional costs associated with purchasing and maintaining a car:

1. ‘On the road fees’ - This is a fee charged by dealerships to legally get the car onto the road. This involves licensing, registration, the roadworthy test and the administration that is undertaken to get the car to you. The fee varies from dealer to dealer, and can be paid upfront or included into your total amount payable for the car.

2. Car insurance - While car insurance isn’t legally required for those buying a second hand car, it is a vital purchase to make to ensure you are financially protected in the event of an accident or damage to your car.

3. Deposit - the deposit is an amount you can pay upfront in order to lower the total cost of the car, and inevitably your monthly repayments.

4. Interest - The interest is an amount added by the bank to loans. The interest rate you will be charged is dependent on the current repo rate set by the South African Reserve Bank in conjunction with how healthy your current credit score is.

5. Balloon payment - A ‘balloon payment’ is an agreement that offers you cheaper monthly repayments, but requires you to pay a lump sum at the end of your repayment period to cover the difference. While the cheaper monthly payments can sound enticing, it leads to a higher amount paid in interest and can often leave you out of pocket at the end if you don’t have the lump sum readily available.

Applying

Applying for vehicle finance is a rather simple process that requires a couple of essential documents. You will need to submit a copy of your driver’s licence, proof of address, payslips and bank statements. These documents are used by banks to assess whether you qualify for financing, what your interest rate will be, and ultimately what your repayments will amount to. Applying for vehicle financing can be done with the help of the dealership’s finance executive, who will be able to run you through the entire process with you from start to finish.

When applying for finance, you will be offered extra options in the form of extended service plans, or extended maintenance plans. It’s worthwhile to note that these add ons are only worthwhile if you can afford them and if you feel you would benefit from them. If they are not within your budget or you already have a similar plan in place, do not feel obliged to purchase them just because they have been offered.

Buying a car is one of the biggest financial milestones you can make, and it should not be filled with fear and doubt. Remember these basics and gear up for a life of fun and independence in your very own car.