South African consumers are driving themselves into the red when buying cars by choosing not to pay a deposit and opting for extended payment terms and balloon payments.

This is the view of Colin Morgan, director at used car retailer getWorth, who says that there are many options for car finance payment periods and deposits but choosing the right car finance terms is essential to avoid regret further down the line.

“Interest on car loans is an expensive cost, so the simple advice is: make as high a deposit as you can and pay the loan back as fast as you can afford,” he advises.

“For example, if you repay R100 000 of finance over 48 months with 12.5% interest, you will have paid about R27 500 in interest over that period. Extend the repayment period to 72 months and your total interest bill rises to around R42 500.”

If you can afford it, Morgan says that it is best to avoid residual values or balloon payments as they increase interest costs more than you realise.

He says: “In the above example, if R100,000 over 72 months cost you R42 500 in interest, financing R125 000 with a R25 000 balloon would cost you about R61 400 in interest. Plus, there is the stress of having to find the money to cover the balloon payment when it comes due.”

Morgan points out that the other benefit of higher deposits, repayments over shorter periods and avoiding balloons is that you are less financially exposed.

“Almost every car loan on a new car with no deposit will have a period during which the value of your car is less than the settlement value on your loan,” he adds. “Lower deposits and longer terms will result in a larger shortfall and it will take longer to close the gap. If something happens and you need to sell your car, you will have to come up with cash to fund the shortfall.”

He says that this can have dire financial consequences. “We shudder when we hear from unsuspecting people who have chosen no deposit, a six-year repayment plan and a substantial balloon on new cars – the hard truth is that their car value may never rise above their loan value, even after they have been paying it off for many years.” 

Morgan says that while it is exciting to buy and own a nice car, it’s not so exciting to financially expose yourself. “If you find that you have to take 72-month repayment terms with a large balloon at the end to afford the monthly repayments on the car you want, we suggest opting for a more affordable model,” he says.