The top 3 ways to finance your car
- Applying for a car loan
- Utilising a home loan or mortgage to finance
- Taking out a personal loan
Choose finance that suits your budget and your lifestyle.
1 | Apply for a Car loan
If you have a credit history, you can apply to get car finance, either through a dealership or directly through a bank (such as Investec). There are various options for how you borrow and pay back the money with a car loan, each of which has various pros and cons. The three most common repayment options are:
- Installment-sale agreement: This allows you to buy a car from a dealer or a private seller and pay for it in equal monthly installments (including interest) over a fixed term, usually from 12 months to 72 months. The bank or credit provider owns the car until it has been paid for in full and when the final installment is made, you become the official owner.
- Installment sale with a balloon payment: This type of loan allows you to buy a car from a dealer or private seller and pay for it in equal monthly installments with a balloon or lump sum payment as your last payment (typically this is around 30% of the purchase price). Although this deal reduces your monthly installments, remember you have to pay a large sum of money at the end of the contract, which could put a strain on your finances if you don’t have that money readily available.
- Lease agreement: With a lease agreement you pay monthly installments in exchange for full use of the car during the lease term, subject to certain restrictions (eg a limit on your mileage or that you return the car in a good condition). At the end of the lease term, you can choose to return the car to the lessor (usually the bank), buy the car from the lessor, or renew the lease agreement.
Is it a good idea to finance a new or used car?
Whether you finance a new or used car usually comes down to a question of your budget – but you must be a realist.
Of course, buying a used car may have its own advantages. It’s less expensive, so you might be able to get a nicer model and the monthly insurance will be less. Because you cannot tailor-make the car to suit your taste, you might have to spend more time looking online and visiting dealerships to find the perfect fit. However, make sure that you buy from reputable dealers who will know the car’s service history.
On the other hand, if you buy a new car, you can choose the model, the interior and exterior and any extras (plus it comes with a warranty). Generally, it features the latest safety measures and fuel efficiency is optimal. A service and maintenance plan is included, which will help avoid exorbitant bills when your car is due for a service.
However, you’ll be paying a premium for that new car smell. And be aware of the car’s depreciation – it can lose 40% or more of its value in the first year.
Is it better to finance a car directly through a bank or through a dealership?
Financing a car through a dealership or through your bank both involve the same process – the only difference is that the dealership will do the administrative work of setting up the loan agreement on your behalf. For some people, the simplicity of this is appealing, but you may be able to get a better deal if you go directly through your bank where you have an existing relationship.
If you can manage to get a pre-approved loan, you may have more leverage when finalising the purchase with the seller. It’s also a good way of preventing a car salesperson from convincing you to take on a more expensive car, with a bigger loan than you can afford.
What about credit shortfall insurance?
If something happens to your car in the first year, your deposit or credit short-fall insurance should cover the full debt. This applies whether you’re buying a pre-owned car, or if its brand new.
Credit shortfall insurance is necessary if your car is stolen or written off in an accident and your insurance only covers the market, retail or trade value of your vehicle.
For example, say you buy a car for R200 000 and the car is financed. You insure the car for its retail value and opt for credit shortfall insurance. And if the car is stolen months later when the retail value is R150 000 – you would still owe the bank R180 000. So, the shortfall amount is R30 000, which is covered by the credit shortfall cover. If you did not take the additional cover, you’d have to settle this amount from your own back pocket.
2 | Financing a car from a home loan or mortgage
If you already have a home loan with an access facility, taking money out of your home loan facility may be the less expensive way of financing a vehicle. This is because, in general, the interest rate on your home loan will be lower than with a car loan.
- Less administrative work, since your home loan is already in place
- Interest rates are lower, therefore it costs less to borrow the money
- You need to have a home loan already
- You can only withdraw the amount of money out of your bond that you have paid in over and above your monthly home loan repayments
It’s important to get the car you can afford.
3 | Should you take a personal loan to buy a car?
Sometimes getting a personal loan may be your only option for buying a car if you’re buying from a private seller, or you’re buying an older car that a bank isn’t willing to finance.
- You can buy an older vehicle that a bank or dealership wouldn’t be willing to finance
- You get the entire amount of money at the outset, so you may be able to negotiate a lower price on the vehicle since you’ll be paying the seller in cash
- You don’t need to put a deposit upfront, which some banks or dealerships may require
- You own the car immediately
- Since these loans are unsecured, interest rates are higher and therefore your monthly repayments will be more
- If you don’t have a healthy credit score, it may be difficult to get a personal loan
Get the car you can afford
Next to buying property, buying a car is one of the biggest purchases you’ll make during your life. Making sure you understand your options and the pros and cons of each can go a long way to ensuring you get the best possible deal.
You don’t want end up in debt, so look for a deal that’s both affordable and adds value to your life. That way, you will drive off with a set of wheels that you really love.