Have you just found your perfect job, and are now looking to buy your first car as another major step towards adulthood and responsibility? It’s all very well to find a car that you both like and can afford, but you also need to understand all the financial jargon that comes with making the purchase.
There is no shame in admitting you don’t know what a balloon payment is, or the difference between fixed and linked interest rates. What about the warranty, and do you need a service plan? While all these terms can be intimidating the first-time round, doing research and asking questions will ensure you get the best financial deal on your set of wheels.
WesBank, the country’s leading vehicle and asset finance company, knows all about guiding young professionals through the daunting task of vehicle ownership. As such, WesBank has created a custom fit product – Graduate Finance – tailored specifically for graduates to help get you behind the wheel, and on your way to career success and financial freedom.
Before you get to the part where you drive off in your car, let’s get back to understanding the payment deal to make sure you sign up for the best financial plan that suits your needs and more importantly, your pocket.
“Car ownership is more than the initial price tag. A customer will need to consider monthly repayments, plus the added costs of fuel, comprehensive insurance cover and general maintenance and service expenses when buying a car,” says Kutlwano Mogatusi, WesBank Motor’s Communication Specialist.
“There isn’t a one-size-fits-all solution to structuring a car finance deal. By being totally honest with yourself and knowing how much you can realistically afford on the vehicle repayment, you are on the best-informed path to owning a car. As a responsible lender, WesBank will only provide credit for an amount that you can afford to pay back.”
So, here’s a quick guide to understanding all that jargon and getting you vehicle finance savvy so you can make the right choices:
The interest rate affects the amount a bank charges you for borrowing money and the amount you need to pay back is determined by the interest rate on your finance agreement. The current low interest rate is good news for anyone repaying a vehicle finance loan.
Fixed or linked interest rate
You can choose between a fixed or linked (variable) interest rate on your vehicle finance agreement. As it says, a fixed interest rate remains the same, as does your monthly instalment. A linked rate fluctuates with the prime interest rate set by the South African Reserve Bank – if the rate increases, so will your payment but if the rate goes down, you will benefit from a lower monthly payment.
This is a cash amount you pay upfront before the vehicle finance agreement starts. This amount is deducted from the price tag, so it makes sense that the bigger the deposit you can pay, the less you will owe on the car in the long run.
The finance period is the length of time you agree to in the contract to pay off the car. It affects your monthly instalment and interest amount. A longer period may mean a lower instalment but the interest adds up so you could end up paying more. A shorter payment period might incur a slightly higher monthly payment but lessens the interest paid out in the long term, which is a good thing.
A balloon payment is a lump sum amount that still needs to be paid at the end of the vehicle finance contract. So, on the upside, while it reduces your monthly instalment for the contract period, you will need to settle it in full at the end, so be cautious of this payment option. Because you may end up paying more interest in total in the long term, you need to make sure you have budgeted and saved enough to pay off the outstanding balloon payment. This amount however can now be refinanced, which will extend your term to pay back the car loan.
Total cost of ownership
As mentioned, there’s more to owning a car than paying the monthly instalment. You need to budget for the running costs too – fuel, insurance, licence, servicing, maintenance, tyres and brakes, tolls, maybe the odd speeding fine! It’s important to buy a car you can afford even if it’s not yet the car of your dreams.
There are plenty of tempting insurance offers to choose from, however, WesBank recommends comprehensive insurance cover for a first-time car owner. This will cover you in the unfortunate event of accident damage, theft or vehicle write-off, plus you are covered for third party damage, which is damage to another vehicle in the case of an accident. The high risk of driving an uninsured vehicle is just not worth it.
A new car usually comes with a manufacturer’s warranty that would cover a faulty fuel gauge for example, but not general wear and tear on the brakes. It lasts for a certain time period but the finance provider, such as WesBank, can extend the warranty period, and can also offer you a warranty when buying a used car.
Usually covering the cost of a standard service, a service plan pays for your car’s regular services at set intervals (period of time or kms driven) as stipulated by the manufacturer. Be sure to understand what repairs or parts are excluded from the plan to avoid a nasty bill following a service.
Maintenance plans differ in what they offer but most include the cost of servicing plus general vehicle wear and tear repairs to keep your car running efficiently. Again, make sure you are 100% clear on exactly what the plan covers and what is excluded.
“Now that you understand the jargon and consider yourself to be vehicle finance savvy, all that’s left is to check the vehicle finance agreement, including the small print, and sign on the dotted line – but, only once you’re satisfied with all the terms and conditions. Then, you are ready to safely take to the open road in your very own car,” says Mogatusi.