Different ways to finance your car

Buying a car isn’t a straightforward decision.

From buying it outright to using finance, there are several options and many variables, advised MotorHappy.

“Buying a car is probably the second-most expensive purchase of your life, after a house. So, it’s important to choose the best financing option for your budget and lifestyle,” said Jarrod Berman, Managing Director of MotorHappy.

“Paying cash upfront is cheapest option because it means you won’t have to pay interest – but it’s not an option available to most people. Choosing to finance your car frees up your finance to take care of day-to-day costs of living while still getting you behind the wheel.”

As with any financial decision, if you opt to finance your car, it’s important to know what you’re signing up for.

• Installment sale agreement:

One of the most common ways an individual can finance a car is through an installment sale agreement. This agreement is the most straightforward way, allowing you to finance a car with a pre-agreed upon interest rate and monthly payment that will not change during the loan if you opt for a fixed interest rate. If you choose a variable interest rate, your monthly payments will increase or decrease when the prime interest rate changes.

The loan length is also pre-determined and can range from just 12 months up to 72 months. The shorter the loan term, the higher the payment, and the longer the term, the lower the monthly payment. Most of the time, an installment sale agreement requires a down payment, and the higher the deposit, the lower the monthly cost.

With installment sale agreements, there is also the option of a balloon/ residual payment, which is a lump sum that is due at the end of your repayment period. This lowers the monthly payments, but it requires you to have enough money saved to pay for the balloon payment at the end of the contract. You can also refinance the balloon payment, but it would make the total cost of owning that car quite high.

• Guaranteed future value (GFV)/ Guaranteed buy backs (GBB):

Guaranteed future value/ guaranteed buy backs (GFV, GBB) are quite different to using an instalment sale agreement. GFVs guarantee the value of a vehicle by the end of the contract, but there are certain terms that need to be met, the three of which are the following:
• Start a new GFV contract with a new car
• Return the car to the dealership without entering a new contract for a new car
• Pay the remaining balance on the car and own it

• Lease or rent to own:

Another popular option is leasing a vehicle or renting to own. A lease is essentially renting a car on a long-term basis for a pre-determined period and monthly payment. The lease contract allows you to use the vehicle without owning the vehicle.

At the end of the lease term, you will have three options:

• Return the vehicle to the dealership and start a new lease contract with a new vehicle
• Purchase the vehicle you have been driving
• Leave the dealership and try a new brand/ dealership

• Know your credit score before applying for car finance:

The information in your credit report is used by most of the credit and service providers and is calculated using a formula that evaluates how well you’ve paid your bills, how much debt you carry and how all of that stacks up against other borrowers. Essentially, it tells you in a single number what your credit report says about your management of existing credit.

A high score is favourable to financial providers, while a low score implies that you have a negative credit rating and either your request for finance will be denied, or your interest rate will be even higher. Credit providers use different scoring methods, but a low score is between 300 and 609, a good score is between 650 and 699, and an excellent score is above 750.

“Finding a new vehicle has been made simpler by the different financing options. Practices like pre-approval, researching the best terms, shopping for deals, and even buying used give you options to save money and still buy an excellent vehicle,” advised Berman.