NEW CAR DEALS: What's the difference and what are you actually signing up for?
By: Kriben Reddy
JOHANNESBURG - Drive now, pay later. Get your first six months free. No deposit, easy terms. Free extended warranty with every vehicle sold in November. Free sunroof and towbar. R150 000 off. A new car every 3 years, no questions asked.
Right now, there are plenty of alluring deals available out there as car dealerships and manufacturers get creative to try and save a disastrous year. But before you get carried away, remember there’s far more to a car purchase than getting a ‘good deal’ or a big discount.
In fact, deals and incentives tend to distract us from the most important elements of buying a car: what car do you really need? What car can you comfortably afford? Is it a responsible purchase? Only once you’ve answered those questions, should you start looking at the deals that are available.
It also helps to understand the various type of deals and incentives that the car industry uses to try and get you into a new set of wheels and the pros and cons of each.
Extending the term
Generally, in the past vehicles have been financed over 48 or 60 months. In today’s market, we’re seeing the term being extended to as long as 72 months to create lower monthly premiums, thereby increasing affordability. The downside is that you’re paying an additional 12 months of interest, and you’ll be in the vehicle for longer. This isn’t generally a challenge in a new car, but in a used car, the longer you own it, the more maintenance costs will come into play.
Low interest rates
Right now, we’re sitting with historically low interest rates, which can certainly affect affordability. Bear in mind, though, that not all consumers will get the lowest rate.
This is because dealers and lenders look at levels of impairments and delinquency, where a customer is three months or more in arrears, and price that into their offer. Delinquency rates across the market have risen from 3.5% of financed consumers in 2017 to around 7.2% in the second quarter of 2020. Still, if you are in good credit standing, you may be able to negotiate interest rates.
Balloon payments have become increasingly popular in recent years. Here, you defer part of the payment to the end of the term. This is an outstanding amount, usually upwards of R100 000, that will need to be refinanced at the end of the deal. Think carefully before you take this option, and balance the current savings on your payment with a longer-term view. Don’t simply use a balloon payment to buy up into a more expensive vehicle. It may come back to haunt you later.
Many manufacturers are deferring the first few months of instalments, so you get your car and only start paying after 3-6 months. While this does create some room for a consumer, you still have to work out what happens to your budget when you start paying, and factor in the total cost of ownership. Our advice is that the vehicle must be within your budget to start with, and deferring the instalment should allow you to save the money you would have spent and use it wisely. Remember, you are still in for the full term – it just starts three, or six months later.
This structure allows you to purchase a vehicle today, and the manufacturer guarantees that in the future – generally after 36 months – you can give it back and get a new one. This works for people who like to get a new vehicle often – but beware. It comes with restrictions around the condition of the vehicle and the mileage you can drive each year, and if those restrictions are breached, you will incur penalties. If you go this route, be very sure to read the fine print.
With a lease, your monthly instalment includes the insurance and maintenance of the vehicle, and at the end of the term, you give the vehicle back and get a new one (or not). In South Africa, it’s not a structure traditionally used by consumers, but more businesses and corporates.
Deal or trade-in assistance
At the moment, there are some extremely attractive deals available, depending on the price and the age of the vehicle. We’re seeing dealers and manufacturers giving discounts of R150 000, or even more, on some models. But do your homework: a more expensive car than you could have ordinarily been able to afford will impress your buddies now, but at some point, you’re going to have to start buying tyres and maintaining the vehicle yourself.
Many people battling with the economic fallout of Covid-19 are looking to refinance their cars over a longer-term to create affordability. It’s not ideal, as it simply keeps you in a depreciating asset for longer. Unless you really have no other option, this is not a recommended route, as the total amount that you end up paying could often be enough to buy a small house.
Bottom line: do your homework
There are plenty of great-looking deals out there right now. But don’t be blinded by the incentives: do your homework, and buy a car that fits your needs and budget first. Then make a smart purchasing decision.
*Kriben Reddy is vice president of Auto Information Solutions at TransUnion Africa