At the start of your career, you probably just need a set of wheels to get you from home to work, to clients, and everything in between – both reliably and safely.
But once you’ve been working for a few years, you may want to upgrade to something a bit fancier. Whether you’re upgrading your car or buying one for the first time (new or used), here are three different ways to finance your vehicle.
1 | Car loans
If you have a credit history, you can apply to get car finance, either through a dealership or directly through a bank such as Investec. There are various options for how you borrow and pay back the money with a car loan, each of which has various pros and cons. The three most common repayment options are:
Installment sale agreement: This allows you to buy a car from a dealer or a private seller and pay for it in equal monthly installments (including interest) over a fixed term, usually from 12 months to 72 months. The bank or credit provider owns the car until it has been paid for in full and when the final installment is made, you become the official owner.
Installment sale with a balloon payment: This type of loan allows you to buy a car from a dealer or private seller and pay for it in equal monthly installments with a balloon or lump sum payment as your last payment (typically this is around 30% of the purchase price). Although this deal reduces your monthly installments, remember you have to pay a large sum of money at the end of the contract, which could put a strain on your finances if you don’t have that money readily available.
Lease agreement: With a lease agreement you pay monthly installments in exchange for full use of the car during the lease term, subject to certain restrictions (eg a limit on your mileage or that you return the car in a good condition). At the end of the lease term, you can choose to return the car to the lessor (usually the bank), buy the car from the lessor, or renew the lease agreement.
Is it a good idea to finance a new or used car?
Whether you finance a new or used car usually comes down to a question of your budget – but you must be a realist.
Of course, buying a used car may have its own advantages. It’s
less expensive, so you might be able to get a nicer model and the monthly
insurance will be less. Because you cannot tailor-make the car to suit your
taste, you might have to spend more time looking online and visiting
dealerships to find the perfect fit. Make sure you buy from reputable dealers
who will know the car’s service history.
On the other hand, if you buy a new car, you can choose the model, the interior and exterior and any extras (and it comes with a warranty). Generally, it features the latest safety measures and fuel efficiency is optimal. A service and maintenance plan is included, which will help avoid exorbitant bills when your car is due for a service.
However, you’ll be paying a premium for that new car smell. And be aware of the car’s depreciation – it can lose 40% or more of its value in the first year.
Is it better to finance a car directly through a bank or through a dealership?
Financing a car through a dealership or through your
bank both involves the same process – the only real difference is that the
dealership will do the administrative work of setting up the loan agreement on
your behalf. For some people, the simplicity of this is appealing, but you may
be able to get a better deal if you go directly through your bank where you
have an existing relationship.
If you can manage to get a pre-approved loan, you may have more leverage when finalising the purchase with the seller. It’s also a good way of preventing a car salesperson from convincing you to take on a more expensive car, with a bigger loan than you can afford.
What about credit shortfall insurance?
something happens to your car in the first year, your deposit or credit
short-fall insurance should cover the full debt.
Credit shortfall insurance is necessary if your car is stolen or written off in an accident and your insurance only covers the market, retail or trade value of your vehicle.
For example, say you buy a car for R200 000 and the car is financed. You insure the car for its retail value and opt for credit shortfall insurance. And if the car is stolen months later when the retail value is R150 000 – you would still owe the bank R180 000. So, the shortfall amount is R30 000, which is covered by the credit shortfall cover. If you did not take credit shortfall cover, you’d have cover this amount from your own back pocket.
2 | Financing a car from a home loan or mortgage
If you already have a home loan with an access facility, taking money out of your home loan facility may be the cheapest way of financing a vehicle. This is because, in general, the interest rate on your home loan will be lower than with a car loan.
work, since your home loan is already in place
Interest rates are
lower, therefore it costs less to borrow the money
You need to have a
home loan already
You can only withdraw
the amount of money out of your bond that you have paid in over and above your
monthly home loan repayments
3 | Should you take a personal loan to buy a car?
Getting a personal loan may be your only option for buying a car if you’re buying from a private seller or you’re buying an older car that a bank isn’t willing to finance.
You can buy an older vehicle that a bank or dealership wouldn’t be willing to finance
You get the entire amount of money at the outset, so can negotiate a lower price on the vehicle since you’ll be paying the seller in cash
You don’t need to put a deposit upfront, which some banks or dealerships may demand that you go beyond your loan
You own the car straight away
Since these loans are unsecured, interest rates are
higher and therefore your monthly repayments will be more
If you don’t have a healthy credit score, it may be
difficult to get a personal loan
Get the car you can afford
Next to buying property, buying a car is one of the
biggest purchases you’ll make during your life. Making sure you understand your
options and the pros and cons of each can go a long way to ensuring you get the
best possible deal.
You don’t want end up in debt, so look for a deal that’s both affordable and adds value to your life – so that you drive off with a set of wheels that you really love.
If you’re an Investec client with a Private Bank Account, you can finance any new vehicle for up to prime minus 1%.