Financing a car is a big commitment, both in terms of duration and impact on your budget. A lumpsum saving can help offset this significant expense, and increase your chances of landing a suitable loan.
We investigate the vehicle financing routes you can take, and how much you should save by way of a deposit.
Nunben Dixon, head of Gumtree Automotive, says that, if you qualify for the monthly installment on the full value of the vehicle that you wish to purchase, there is no need to put down a deposit. However, it may be wise to do so anyway.
“Putting down a deposit reduces your monthly repayments because you’ve effectively paid for a piece of the car upfront. This means that you are taking out a smaller loan,” says Dixon. He explains that, if you don't have cash for a deposit, you can trade-in your old vehicle against the value of the new car to reduce the cost. “The downside of this strategy is that the dealer needs to make a profit against your old car, so you'll probably get a little less money than if you sold it privately,” he explains. “If you decide to trade your car in, do your research and know the value of the car so that you can haggle.”
Another option for those who can’t afford a cash deposit is a balloon payment deal. In this scenario, you pay a large lump sum at the end of your agreement. This makes your monthly installments a lot more affordable.
Tinashe Ruzane, CEO and co-founder of FlexClub, says that a balloon payment may make your car seem more affordable, but it guarantees that the balance of your loan will be higher than the value of your car for several years. This is what financial experts call negative equity. “In other words, you increase the risk to your financial health by using balloon payments. A good guideline is that if you can’t afford a car without the balloon payment, it’s too expensive for you,” says Ruzane.
He adds that the rule of thumb when financing a vehicle is that it typically costs R2,500 per month in repayments and insurance premiums for every R100,000 that you borrow. He explains that you should expect that a R300,000 car will cost you more than R7,500 per month, assuming there are no balloon payments or deposits.
Mothusi Dire, head of VAF automotive retail and internal channels at Standard Bank, says that you should be guided by your budget when determining how much you would like your repayment to be. “Make sure that you shop around for your preferred vehicle, and understand which extras or options come with your purchase,” says Dire.
What should you be paying for your car?
Dixon says that you should work out what your monthly installment and insurance amount will be every month. Once you have this figure, you should save three times this amount, so that you have a three-month buffer if you lose your income.
“This will also give you an indication of what it will be like paying for that car every single month. If you find that it’s unaffordable, you should look at a different car that’s in line with your budget. If you can set the funds aside without a hitch, you’ll have saved your deposit,” he says.
In general, the total monthly installment you pay should not be more than a third of your disposable income, according to Dixon. He points out that you shouldn’t keep applying for finance if you’ve been rejected a few times, as this can have an impact on your credit score. Instead, he suggests paying off your debt first.
“Come up with a strict budget and savings plan. Ask yourself where can you cut spending. Your Netflix subscriptions, eating out at restaurants, and a takeaway coffee every morning add up. Start making sacrifices and you’ll be surprised by how much you can save,” Dixon says. He concludes that, if you absolutely can't come up with a deposit, you should look at car dealerships with no deposits or cashback deals.