By Angelique Ruzicka, editor, Justmoney
You’ve just found the car of your dreams but there’s one small hiccup: you can’t afford it unless you take out a car loan. Taking ownership of a car by way of a loan is a large undertaking and many people don’t realise the full extent of the costs involved buying a vehicle. Justmoney spoke to Keith Watson, managing director of car leasing firm Ariva about the pros and cons of buying a vehicle.
Justmoney (JM): Some car dealerships if they have their own finance division can get you a good loan. Is it possible to get a really good finance deal say below prime (9.25%)?
Keith Watson (KW): Having a good credit record is the key to it. All banks price on risk so if you have a good credit record and you’ve looked after it then you should get a good deal. If you have a bad credit record they charge for the risk they take on.
JM: What’s the best rate that anyone can expect these days?
KW: Sometimes rates are [as low as] three or four percent but there is deal making going on behind the scenes to get that rate that low. Banks borrow at a certain amount but they won’t make their money back if they lend money out cheaper than for what they borrowed the money for. Whether the manufacturer or dealer is contributing there is a deal happening somewhere. It’s an effective interest rate and it’s not something you would normally get through a bank.
JM: If someone puts a good deposit down, can they expect a better rate?
KW: The more of a deposit you put down the less they may charge on interest. You are improving the risk to the lender the more of a deposit you are putting down. It means they have less to try and collect at the time of default.
JM: What’s the maximum that people should be paying in terms of interest rates?
KW: The NCA limits the amount of interest can charge. Very seldom do you get up to those levels, which is now around 22/23%. If you are above 5-6% over prime that is the maximum that you should be paying and you need to shop around. That is where the dealers can help as well. They have access to a number of finance houses and they can do the shopping around for you.
JM: What’s the difference between a maintenance and service plan?
KW: With a service plan you generally buy it for a period and it covers you for all your normal manufacture based services. You would, for example, have to go in for a service every 15,000 kilometres. It’s a good budgeting tool.
With a maintenance plan there’s a bit more involved and will include things like tyres, clutches, globes and most wear and tear items falls under a maintenance plan. If you don’t want the surprises of big costs that can hit you at certain times it’s recommended. A lot of cars come with them so if you want to drive a car for five years or more I suggest you get a plan to fit this.
JM: Should you always make sure that there’s a service and maintenance plan?
KW: If you are a wealthy person buying a cheap car that you may not need a service or maintenance plan. But it generally doesn’t work like that. People generally buy vehicles at the maximum of their affordability so I would suggest fixing the costs and protecting yourself from the surprises that may arise.
JM: What’s the difference between renting and leasing a car?
KW: Car rental is when you rent the car from the airport when you go on holiday. We do car leasing. Car leasing is an acceptable way of accessing a car. The customer doesn’t take on the risk of depreciation when they lease a car it’s the car leasing company that does that.
You can drive a new car every three years with no risk on depreciation i.e. trade in value vs. outstanding debt owed to the bank. You hand the car back in good condition and the responsibility to re-sell it is the leasing companies.
For example: Take a Hyundai iX 35 and assuming traditional finance over 60 months with no balloon payment, the monthly instalment is around R6900. With a three year lease the monthly cost comparably would be around R6500. This example is a like for like comparison i.e. excluding insurance, service and maintenance costs, tyres, petrol etc., so merely a comparison on monthly instalment costs. Of course terms and conditions apply because it does depend on your credit risk profile.
JM: What other general advice do you have for those who are keen on owning a car?
KW: There is a lot of stuff to consider including insurance, petrol costs, tolls, vehicle finance costs, balloon payments etc.
JM: Should you buy a new or used car?
KW: With new cars you have to consider the depreciation problems. Consider used - there are some really good demo one year old vehicles that are good value. It’s a personal choice. A lot of people like to buy a new car and drive it off the show room floor but they must look at the long term complications of owning such an asset.
People can understand some of the basic costs but they don’t understand the real costs such as depreciation. In three years you could lose 50% of the value of the car. So when you come to trade it in what you owe on the car could be more than what the car is worth. Quite often, you have to pay in. That is a big financial risk to consider. Consider the long term total cost.
JM: How can you find out how much a car can depreciate by?
KW: Ask fleet companies, such as ourselves, finance companies or the likes of TransUnion.