This method to getting a new car every couple of years is growing in popularity – but there’s a catch

With more vehicle finance options than ever before, car buyers are often faced with a long list of confusing terminology and cryptic numbers before they can even think about driving away in their new wheels.

This is according to Ghana Msibi, WesBank’s executive head for Sales and Marketing, who said that the temptation of a new car can sometimes lure a buyer into a commitment that isn’t an ideal fit for their budget.

Below Msibi outlined three of the most common purchase plans and simplified the jargon to help buyers choose the best payment plan for them.

Installment finance

This is the most straightforward of all vehicle finance options. Monthly repayments are calculated on the purchase price of a vehicle minus whatever deposit is put down at the start of the deal.

Finance terms can be structured into time frames of between 12 and 72 months. The longer the term, the lower the monthly repayment will be, but be aware that interest will add up over longer terms and the total amount repaid to the bank will increase proportionally.

Installment finance with a balloon payment

Similar to instalment finance, except a portion of the purchase price is set aside so that the repayments are calculated on a lower amount. Simply put, balloon payments are similar to deposits except they’re payable at the end of a term instead of at the beginning.

Buyers must be cautious of the amount put into a balloon because they will be responsible for the lump sum once the finance term is finished.

While it may be attractive to have lower monthly repayments because a larger chunk of the purchase price is placed into a balloon, the repayment of a balloon can be an unexpected debt as this amount will either need to be settled or refinanced at the end of the deal.

Guaranteed future value

Guaranteed future value, also known as GFV or any number of brand-specific titles, is becoming an increasingly popular form of vehicle finance in South Africa.

It is important to note that a vehicle’s value begins depreciating (losing monetary value) from the moment it leaves the showroom floor.

In line with this depreciation, a GFV plan calculates what the future monetary value of a vehicle will be if specific conditions of vehicle condition, mileage and maintenance are met. This future value is guaranteed at the start of the agreement.

This makes planning ahead easier as consumers know exactly what their car will be worth once the pre-determined contract term (usually between three and four years) is reached.

The customer is given three choices at this point – they can either enter into another GFV deal and drive away in a new vehicle, settle the outstanding amount and own the vehicle, or simply return the vehicle to the respective dealership and walk away (provided the driver didn’t exceed the allotted mileage and the vehicle is in acceptable condition).

With a GFV plan, a consumer is essentially only paying for the use of the car. This is why it’s important to know more or less the distance the vehicle will cover during the GFV term. Consumers are liable for penalties if any conditions of the GFV agreement aren’t met.

For a better idea of the costs involved, BusinessTech spoke to Jaguar Land Rover in July about its GFV plan:

Land Rover Discovery 2.0 P 221kW S – R988,724

Land Rover Discovery 3.0 D 190kW HSE – R1,288,006

Read: 4 ways how buying a car in the future will change

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This method to getting a new car every couple of years is growing in popularity – but there’s a catch