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Juliet McGuire

Financing a car? Let me tell you what you need to know

I often wonder how people can afford to buy cars. Especially when they are over the R200 000 mark. I don’t know about you, but I don’t want to live beyond my means and if I had to finance a R400 000 car, I certainly would be. But there are ways and means of owning the car you really want. It just might mean being a little clever about it.

The head of Auto Information Solutions at TransUnion Africa, Kriben Reddy, lists three options when it comes to financing your car. Each one has its advantages as well as disadvantages, so you should take note of his guidelines. My only advice is, be really smart about your choice of car. Work out your spending limit and stick to it.

INSTALMENT SALE

This is the most popular option but one should understand that not all deals are created equally. You can lower your monthly premium by taking out a balloon payment, BUT, it will cost you a lot more in the long run. The same goes for if you decide to make the repayment term longer. Paying off a R200 000 car in the shortest amount of time, with a deposit, could save you more than R60 000 over 6 years – over 30% of the purchase price of the car.

The upside

  • It’s all yours when you make that last payment. Financial freedom – until you buy the next one, that is.
  • No limitations to vehicle use. It’s yours – and as long as you’re happy to pay for the services and fuel, you can drive it how you like.

The downside

  • Depreciation. A car’s value starts dropping the moment you drive it away from the dealership. It’s not an asset.
  • Hassle. It’s up to you to dispose of it or sell it when you want to trade up.
  • Maintenance and insurance. Because it’s yours, the responsibility of insuring and servicing it is yours too.
  • Balloon payments. If there’s a balloon payment, you’ll have to come up with a big chunk of money – or refinance the amount, which can get you caught up in a debt spiral.

FULL MAINTENANCE LEASE

A Full Maintenance Lease (FML – and not the F my life version) is whereby you rent the vehicle for an agreed period of time. You pay a monthly fee, which covers all maintenance costs (including services, tyres, oil filters, wiper blades etc), and at the end of the term, you hand back the car and get a new one. This is provided you have stuck to the terms of the agreement.

The upside:

  • The monthly repayments are often lower on an FML than on an Instalment Sale.
  • You get a new vehicle more often.
  • No hassles around getting a trade-in on your old car, or having to sell it privately.
  • No nasty surprises at the end of the term with balloon payments.

The downside:

  • Even though you pay for it every month, you won’t ever own the vehicle.
  • You aren’t able to go on long road-trips. There are strict limits on the maximum number of kilometres allowed, with severe penalties for exceeding them.
  • There is a penalty to get out of the contract early.

GUARANTEED BUY-BACK

This is when the bank and the buyer agree on a value that the car can be ‘bought back’ for at the end of an agreed period.

The upside:

  • You can possibly end up paying lower monthly payments than an instalment sale.
  • You can shorten the period of ownership – which again means a new car more often.

The downside:

  • Like the FML route, deals like this come with strict terms around the upkeep and mileage of the car, and you could be subject to penalties if these conditions aren’t met.
  • You pay insurance for the car.

If you are in the market to buy a car, have a look at CARmag.co.za’s list of cars for sale. And if you are selling your car, be sure to download the FirstCheck app to get all the information you need about your car. As soon as you have found a car you want to buy, use this app to find out everything you need to know about the car’s history.

carmag.co.za

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