Johannesburg - The failed “Drive a new car for R699 a month” scheme has recently placed car finance in the spotlight.
In the deal run by the Satinsky Group, car owners paid a rebated monthly instalment in return for plastering large stickers on their rear windscreens advertising the scheme. But Satinsky pulled the plug and stopped paying the rebate, leaving thousands of car owners battling to meet their repayments, and some having their vehicles repossessed by banks.
The demise of this dodgy deal reaffirms that consumers should make a choice that suits their budget, and opt rather for a cheaper vehicle that doesn’t stretch their financial limits. Prospective buyers can use a monthly affordability calculator such as the one on the Wesbank website, which works out how much you have left to spend on a car after other expenses.
It’s very tempting to opt for a longer-running finance contract with a big balloon payment, as the monthly instalments are more affordable, but you pay a lot more in the end. For this reason WesBank says that in regular instalment sale agreements you should adopt the following mantra: D before B except if it’s C: rather put down a big Deposit before looking at a Balloon payment unless it is Critical.
The bank says that when choosing the length of the payment term, the lower the term, the better. This results in less paid on interest, which is what really determines how much you end up paying for a car over time.
WesBank adds that buyers don’t need to be financial gurus, but understanding the difference between linked and fixed interest rates can save a lot of money. Buyers should be aware of the interest rate, and the fact that this is likely to increase over the next few years. South Africans have benefited for quite some time from a stable interest rate before it was raised by 0.75 percent this year, and it’s uncertain whether we can expect further increases soon.
There are also alternatives to instalment sale agreements, such as leasing. This involves the use of a car for an agreed-upon number of months, and a lessee making rental payments. At the end of an agreement the choice is to return the car, take ownership, or extend the lease. Leasing is an ideal option for those who have a vehicle allowance.
FULL MAINTENANCE RENTAL
Alternatively consumers can opt for a full maintenance rental. With this option the bank assists in sourcing the vehicle, securing the finance structure, calculating residual cost, and paying for maintenance and service costs. This results in a fixed monthly cost for running a vehicle. FMRs are traditionally used by companies that take out fleet finance packages, but this solution is also available to consumers as a package deal, through bank-approved dealers.
These alternative finance options allow consumers the use of a vehicle and the added security of a guaranteed buy-back. They won’t necessarily own a car at the end of the lease, but can save on costs over time. Finance and insurance consultants at dealerships are able to advise consumers on the best finance option for a given scenario.