Why you should think long and hard before you take that ‘unbeatable’ car deal
JOHANNESBURG - So, you’ve survived 2020 and you think you’ll celebrate by treating yourself to some new wheels. I mean, have you seen some of the deals out there right now? You’re a bit light on trade-in value, but that doesn’t matter: you’ll load the difference onto your new vehicle, finance it over 84 months or take a residual, and all is good.
Or is it really? Right now, there are many devices that car manufacturers, dealers and banks are using to help you get out of your old car and into that shiny new dream machine. But it’s important that you understand the ramifications on your finances – and how it affects your ability to get into your next new vehicle.
First, some context. Until 10-15 years ago, it was standard to finance cars over 60 months, or shorter. This generally meant that as consumers, we could get out of our existing vehicles anywhere between 24-36 months, because by then, we would have paid off enough of the car for the trade-in value to cover what we still owed. New car every 2-3 years? Yes, please.
Then, back in 2008, the global recession hit. The impact of this was that it made cars unaffordable for many consumers. So, to try and keep sales going, the industry’s reaction was to discount new vehicles or offer generous incentives.
Fast forward to today, and we’re in a similar situation. The bottom fell out of the car market in 2020 because of Covid-19. At the same time, the prices of new cars are increasing faster than the inflation rate. According to TransUnion’s most recent quarterly Vehicle Pricing Index (VPI), you’re effectively paying 6.7% more for a new car than the same time 12 months ago.
What does this mean? Yes, we’re seeing a range of creative marketing techniques from the industry to try and get people buying cars again.
As a result, we’re seeing some amazing discounts on the market right now. Cars are being financed over as long as 72 or even 84 months, in some cases with residuals – the so-called balloon payment at the end of your term. Banks are also allowing a greater ratio for what they call ‘loan-to-value’, which means if you’re R20 000 short on your trade-in, and your new car costs R100 000, they’ll allow you to finance R120 000.
These approaches make it a lot easier to get you into a new vehicle now. But tread carefully. Be aware that the longer the term, the longer you’re going to be driving the vehicle, as you’ll effectively need to pay off the shortfall before you even start paying the new car itself. Say goodbye to a new car every 2-3 years, and get used to 4-5 years, or longer.
Pros and cons of long-term loans
Let’s look at the pros and cons of taking a loan over an extended period, or financing a shortfall on your existing car
Pros: Reduce your monthly payment
That’s pretty much the only advantage. But if it’s the difference between having a vehicle that you need, and not having a vehicle at all, it could be worth it. Having a longer payment period is also better than not being able to make your car payments, having your vehicle repossessed and doing serious damage to your credit score.
Cons: Longer terms, and shortfall finance, almost always come with higher interest rates
That’s because there’s a greater risk for the bank, and they need to price this into the transaction.
You’ll owe more than what the car is worth for a longer period. This means you will have to drive the car for a longer period before you can look at trading in or replacing the vehicle.
You’ll have to take out shortfall insurance to cover the difference between what the car is worth and what you owe.
All of these factors add up to one thing: you’re going to end up paying more in total, over a longer period, for your new wheels. Proceed with caution and a very clear idea of your own needs and finances. And I say this as a committed petrol-head who would replace his vehicle every year if I could.
The important thing here is that you buy a vehicle that you can afford. Everyone’s circumstances are different, and you must know your own risks and make an informed decision that’s right for you and your needs.
Be safe out there.
*Kriben Reddy is TransUnion Africa vice president of auto information solutions