Buying a car can be a daunting prospect for many newcomers. The combination of huge choice in the market, a large financial commitment and complex financial terms can intimidate first-time buyers, turning an exciting occasion into a stressful nightmare, says WesBank.
For those completely unfamiliar with vehicle finance and the car-buying process, WesBank provides a checklist to help first time buyers through each step.
Start with a budget
The most important part of buying a car is knowing what you can afford. If you have saved up money to buy a car cash, your budget will be determined by your savings. However, if you finance a car – as around 65% of South Africans do – then you will need a loan to buy a car.
Loans are paid off monthly, using instalment payments, which means that each month you need enough money to meet that payment.
To calculate how much you can afford to pay each month, you need to draw up a budget. This will let you see all your expenses alongside your income. You’ll know exactly how much money is coming in monthly, how much is going out, and how much is left over after the bills are paid.
Factors of affordability
Affordability is not just about how much money you can afford to spend right now, it’s also about how much money you can manage to pay for a monthly repayment for a car.
For example, if your budget says you have R5,000 left after all expenses, it does not mean you can buy a car that costs R5,000 per month. That amount has to cover all the other costs of vehicle ownership, including fuel, maintenance, and insurance as well as any other ad hoc or unexpected expenses that crop up.
All of these costs should add up to less than your total budget – which also means leaving room for any increases in these expenses.
“Remember, insurance premiums can increase each year, tyres may need to be replaced and fuel costs are also on the rise. It is therefore best to look at your budget over five or six years; the most popular contract terms for car loans,” the lender said.
Always be insured
Insurance is an essential item for anybody with a car – even if it is not financed. If you use vehicle finance, it is a contractual requirement to have an active comprehensive insurance policy, Wesbank said.
“In the event of an accident a comprehensive insurance policy will pay for damages incurred, even if you are at fault. If the car is uneconomical to repair, also known as a “write-off”, or if it is stolen, the insurance company will settle the remainder of the loan balance with the bank.
“This means you don’t have to worry about paying for expensive accident repairs – or paying off a loan for a car that you can no longer drive.”
Find the right deal
With an idea of how much you can afford, you can start looking for a car that suits your needs. Remember to ask yourself practical questions in this process:
- Is this car economical on fuel?
- Am I using the car for work purposes?
- What is the best option for me, new or used?
- Do I want to have children, and will I need more seats?
- Is a big boot or load bay necessary?
- Will an automatic gearbox be best for me?
- Are off-road capabilities best for my lifestyle?
- Does the car have a service or maintenance plan?
- Do I mainly drive in town or will I travel long distances?
- Do I want to be able to transport passengers comfortably?
- Do I have a preference between a 2-door car and a 4-door car?
- What car safety features are important to have?
- What are my preferred colours for a car and will any of these potentially increase my insurance premium?
Apply to qualify
If you’ve done all your homework and budgeting, you can then go ahead and apply for vehicle finance.
The application process involves providing documents to prove your income (pay slips and bank statements) so that banks can calculate how much you are able to afford.
“If you’ve already drawn up your own budget and are applying for finance that you know you can afford, you will have a higher chance at qualifying for the finance,” Wesbank said.
You can rely on the F&I
Every car dealership has a Finance and Insurance (F&I) executive whose everyday job is purely to inform and assist buyers.
The F&I’s role is regulated by the Financial Advisory and Intermediary Services (FAIS) Act as well as the National Credit Act (NCA). This means that they are legally obliged to give you financially sound advice and explain what you can and cannot afford.
Structure your contract
With the implementation of the NCA, banks now make it possible for you to structure your finance contract in a way that suits your affordability.
“This means that you can choose the contract term, the type of interest rate you want, whether you want to pay a deposit and if you would like to use a balloon payment,” Wesbank said.
Contract terms are the period of time over which you repay the loan. They can be between 12 and 72 months – shorter terms will have higher monthly instalments, while longer terms will yield a lower monthly payment, the bank pointed out.
Two types of interest rate are available to consumers: fixed and linked.
A fixed interest rate will be slightly higher than a linked rate, but a fixed interest rate will remain the same for the duration of the loan.
A linked interest rate will change whenever the South African Reserve Bank changes interest rates. If the Reserve Bank increases the interest rate, it will affect you loan and your monthly instalments will also increase.
If the Reserve Bank lowers rates, your monthly instalments will be slightly lower.
A deposit is a substantial initial payment you can make toward the purchase amount at the time of purchasing the car. Paying a deposit will lower the monthly instalment, or it can help you settle the loan sooner.
By paying a deposit, you borrow less money from the bank, which also means paying less in total interest.
A balloon payment is a large payment that needs to be made at the end of the finance term. “Generally, balloon payments can be between 5% and 60% of the total purchase price, and it can be useful for helping to lower your monthly instalment.
For example, if you want to finance a car of R100,000 with a 10% balloon payment, then you will pay off R90,000 over the agreed period and make a R10 000 payment at the end of the contract term.
“If you do opt for a balloon payment you should remember to save up to make that large payment. Alternatively, you can sell the car and use it to settle the balloon payment, or you can use a new loan to pay off the balloon payment,” Wesbank said.
Count other costs
When you draw up your budget for buying a car you might not be aware of any additional costs – sometimes considered hidden costs.
These include any licensing, registration and administration fees that the dealership may charge for the preparation and delivery of the car. They are sometimes called “on the road” fees, Wesbank said.
“However, these costs have to be clearly explained by the dealership and the F&I. You are allowed to query all costs indicated on the final invoice. It is also possible to pay these fees in cash, rather than including them in the finance package,” it said.