The do’s and don’ts of car finance: Do your homework first
Leasing instead of buying a vehicle is gaining popularity in South Africa.
MBOMBELA – Traditionally, South Africans have leaned towards obtaining financing from a bank when buying a vehicle.
However, over recent years leasing has gained popularity, says Les Mc Master, chairman of the Motor Industry Workshop Association (MIWA).
The association offers a list of do’s and don’ts for prospective vehicle buyers to keep in mind when choosing an option to best suit their needs.
Do your homework first
“The concept of leasing a vehicle certainly has advantages for South Africans in light of rising interest rates, fuel hikes and a shaky Rand, but whichever finance option you go for, make sure you know what you’re getting yourself into from the start,” Mc Master said.
The main difference between a lease and an installment agreement is that the buyer will not own the vehicle at the end of the term of a lease agreement.
However, he or she can renegotiate the contract to take ownership for the residual value. Lease contracts are also for shorter terms.
“Generally, buying a car, paying it off and then keeping it for many years remains the least expensive way to go because despite the fact that vehicles depreciate over time, they do retain some value that you can apply towards buying another car.
“If you lease a vehicle, you only drive it for a fixed period and your monthly payments go towards paying for the depreciation in the vehicle, not ownership. Lease agreements also come with restrictions on how many kilometres you can travel during the period.”
How do you decide which option is better? Research the options and always be aware of the fine print.
“Bank finance can be costly as a large chunk of the monthly installment goes towards interest payments. Banks also want to know that you have a spotless credit history and that you can afford the monthly payments on a vehicle.
“It is a mistake to base affordability on the repayment only. Research has shown that in the current market conditions, the actual monthly installment of an entry-level vehicle accounts for less than 50 per cent of the total cost of ownership.”
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Buyers must also budget for fuel, maintenance and insurance before deciding to go ahead with the purchase of a vehicle.
Another crucial consideration, says Mc Master, is deciding on a linked or fixed interest rate because once you’ve signed the contract, this cannot be changed.
“Now more than ever, a vehicle purchase should be thoroughly-researched and properly thought out.
“Always keep the practical use you want out of the vehicle in mind and consider your average mileage and the increasing cost of petrol,” he concluded.
Do:
- Draw up a budget to establish affordability
- Leave enough spare cash in your budget to absorb rising costs such as fuel and interest rates
- Take the time to read and understand your finance contract
- Contact the bank if you are in a situation where you cannot meet your financial commitments
- Make sure you always have comprehensive insurance on your financed vehicle.
Don’t:
- Overextend your budget
- Provide the bank with false information about your affordability
- Cancel insurance when you are in a financial bind
- Rely on a large balloon payment to make your installments more affordable
- Forget to include all costs in your mobility budget: petrol, insurance, and maintenance.
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