Most people don’t have the cash to buy those shiny new wheels without financing. There are three options when it comes to financing a car. Each has advantages and disadvantages, depending on what you are looking for. Here are some guidelines to help you on your journey:
1. Instalment sale. If, like most people, you go the instalment sale route, it’s worth doing your homework. Not all deals are created equal. The important thing to remember is that you can lower your monthly premium by taking a balloon payment at the end of the term, or taking a longer repayment term - but this will cost you more in the long run. Paying off a R200000 car in the shortest amount of time, with a deposit, could save you more than R60000 over six years - more than 30percent of the purchase price of the car.
* It’s all yours when you make that last payment.
* No limitations on vehicle use. As long as you’re happy to pay for the services and fuel, you can drive it how you like.
* A car’s value starts dropping the moment you drive it away from the dealership. It’s not an asset.
* It’s up to you to dispose of the vehicle or sell it when you want to trade up.
* Because the vehicle is yours, the responsibility of insuring and servicing it is yours too.
* If there’s a balloon payment, you’ll have to pay a big chunk of money, or refinance the amount, which can result in a debt spiral.
2. Full maintenance lease (FML). You rent the vehicle for an agreed period. You pay a monthly fee, which covers all maintenance costs (including services and items that need to be regularly replaced because they wear out, such as tyres, oil filters and wiper blades). At the end of the term, you hand back the car and, provided you’ve stuck to the terms of the agreement, you get a new one.
* The monthly repayments are often lower on an FML than on an instalment sale.
* You get a new vehicle more often.
* No hassles around getting a trade-in on your old car, or having to sell it privately.
* No nasty surprises at the end of the term with balloon payments.
* Even though you pay for it every month, you won’t own the vehicle.
* You aren’t able to go on long road-trips. There are strict limits on the maximum number of kilometres allowed, with severe penalties for exceeding them.
* There is a penalty to get out of the contract early.
3. Guaranteed buy-back. This is where the bank and buyer agree on a value the car can be “bought back” for at the end of an agreed payment period.
* You can possibly end up paying lower monthly payments than an instalment sale.
* You can shorten the period of ownership - which again means a new car more often.
* There are strict terms on the upkeep and mileage of the car, and you could be subject to penalties if these conditions aren’t met.
* You pay insurance for the car.
Kriben Reddy is the head of auto information solutions at TransUnion Africa.