Financing your new car – your options | Cars New Cars Used Cars for Sale Tips to Buy Cars

Financing your new car – your options

Posted on 01. Feb, 2009 by Frank in cars

You’ve reached that stage in your life where you can finally afford to drive the car of your dreams. You’ve done your homework, driven the car, and know how much the dealer wants for it. Now you just have to decide how you’re going to pay for it…

There are a number of ways to pay for your new car. And of course, how you decide to pay for your car will also determine how much you end up paying for it. Below are the most common payment methods and the advantages of each option.

Cash – The ideal option but not one available to many. Buying your car for cash means that it belongs to you from the beginning and you can also sell it at any time, without having to settle outstanding debt with a financial institution first. You will also only pay the price you see and will save thousands in interest.

Part cash, part trade-in – If you have a car to sell or trade in, the dealer will usually be quite happy to take your car as part payment for the new vehicle.

Bear in mind though, that you will probably only be offered book value for your old car, as the dealer still has to add his/her mark up to the price they will sell it at, as well as pay for any minor repairs to the car and pay VAT on the sale if he/she sells your old car to someone else.

If the dealer you are buying from does not sell the make of car you are wanting to trade in, they may re-sell your old car to another dealer on your behalf. This will not affect the price you get for your car as you are not involved in the sale after you agree on the trade-in price you are offered.

Instalment options – This is probably the most common way to finance a car. The law usually requires a minimum of ten per cent deposit and the balance (plus interest) is calculated over a maximum of 54 months (for a private individual) or 60 months (for those with car allowances) at the prime lending rate. Be aware that you can sometimes negotiate a slightly lower interest rate. You can also trade in your old vehicle as a deposit on your new car.

Residual or balloon payment options (Usually for company employees with car allowances as they don’t keep their vehicle for the full repayment period) – This is a way of deferring a percentage of the purchase price until the end of an instalment sale, lease or financial rental agreement. The monthly payments are lower but you have to pay the bank the balance at the end of the instalment period. The idea behind the residual payment method is to link the monthly repayments to the usage of the car and create a payment equivalent to the anticipated market value of the car when it is sold.

You may sell or trade in your vehicle at the end of this period, but make sure that the vehicle is worth more, or at least what the settlement is. For example, if you purchased a car for R100 000, and you took a 60/40 residual payment option over four and a half years, you would still owe R40 000 to the bank when the repayment period is up. If a dealer bought the car for R60 000, they would first settle the R40 000 balance with the bank and you would be left with R20 000 towards your next car.

News flash – Residual payment option available soon to private individuals

From 1 June 2007, both private individuals and those with car allowances will be able to purchase a new car over 72 months (with a residual option) at the bank’s discretion. You can then decide whether you want to return the car to the bank after that time (if it is a rental agreement), pay the amount still owing on the vehicle or trade the car in on a new car.

Using your home loan to purchase a car – If you have an access bond facility, you will have the amount that you have already paid off on your home loan available for your use. You are legally entitled to use this money to purchase a car, as it is yours to spend however you like. For example, if you originally registered a home loan for R1 million, but have paid R200 000 of this loan, then that amount will be available to you to use for a car purchase. If you used that R200 000 to buy a car, the home loan would increase to R1 million again, and your re-payments would be adjusted accordingly.

You will be paying a lower interest rate if you choose to finance your car this way; for example, if you financed your vehicle through a bank, you may have to pay interest at the prime lending rate, but you may qualify for prime less two percent on your home loan interest rate. Also, if you paid off R60 000 owing on your car over fou

four and a half years, your repayments would be in the region of R1500 per month, but only about R650 a month if you financed your car through your home loan.

Even if you have not paid off much of your home loan, but your house has appreciated in value since you bought it, you can have your home valued again, and apply to increase your home loan to the higher value (provided you qualify for the higher amount). When the new bond is registered, you can withdraw the cash to purchase your car (and therefore avoid paying vehicle hire purchase interest) and pay the bank back over 20 years as part of your home loan.

You can always dump extra money into your home loan every month, or make a lump sum payment at any time, when you can afford to do so. This will decrease the repayment period of both your home and your car. If you finance a car through hire purchase, you do not have the option of making extra payments when you can afford to do so.

When choosing your payment options, consider your needs and what you can afford. Obviously, the shorter the loan repayment period, the less interest you will pay, and therefore the less the car will cost you in the long run, but not everyone has too much of a choice when buying a new car.

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