Buying a car is a considered a milestone, both in life and financially. Unless you’re able to fork out the cash, many opt for financing. But often the excitement to drive it off the showroom floor overshadows the need to check if you’re choosing the most-suited option.
To help you make the best-informed decision, Justmoney compares available vehicle financing structures in South Africa.
Tip: Protecting your car should be your priority. To apply for competitive car insurance, click here.
A breakdown
According to Auction.co.za’s co-founders, William Miller and Renaldo de Jager, the following are three ways in which to finance your vehicle:
1. Instalment Finance (Hire Purchase):
Hire purchase or instalment finance as the name suggests allows a user to pay monthly instalments which are calculated on the purchase price of the asset less the deposit that was put down at the beginning.
The bank then adds an interest fee for the money that has been loaned to the client. These finance terms can range from 12 to 72 months, where the longer the term the lower the monthly payment.
However, interest is charged over a longer period costing the client more.
2. Instalment Finance with a Balloon Payment (Residual Value):
Instalment finance with a balloon payment is very similar to instalment finance where a portion of the asset price is collected at the end of the contract resulting in lower monthly instalments.
The idea is that the bank loans the customer less during the contract period, but the client is liable for the balloon at the end of the term.
Balloons are like deposits except that they are to be paid at the end of the contract.
This type of finance also ranges from 12 to 72 months and balloons generally range between 5% and 40% of the full value, based on the client’s credit rating.
3. Guaranteed Future Value (Leasing):
Guaranteed Future Value has recently become a popular method of financing in South Africa.
Banks calculate the future value of the vehicle at the contract end date provided that the condition, maintenance, and mileage conditions are met.
Customers pay a monthly instalment for the contract period and the vehicle is handed back to the bank at the contract end resulting in the client’s account being settled.
This method of finance is very common in other parts of the world where consumers are interested in usership as opposed to ownership.
Users also have the option of keeping the vehicle at the end of the contract but settling the bank for the Guaranteed Future Value.
The pros and cons
|
Financing option |
Advantages |
Disadvantages |
|
Hire Purchase |
· Predictable monthly payments with an option of fixing the contract interest rate. · Ownership of the asset is achieved at the end of the contract term |
· Interest rates may increase the monthly instalment if the contract interest rate is not fixed. |
|
Residual Value |
· Lower monthly instalments. · Ownership of the asset is achieved at the end of the contract term. · Interest rates may be fixed. |
· Interest rates may increase the monthly instalment if the contract interest rate is not fixed. · Consumers tend to not factor in the large balloon payment at the end of the contract resulting in the balloon amount to be refinanced. |
|
Guaranteed Future Value |
· No risk at the end of the contract. · Ability to change the vehicle frequently. |
· If the contract conditions (mileage and maintenance) are not adhered to, the consumer can end up with a massive bill at the end of contract. ·This is merely a rental option where the consumer will never own the vehicle. |
Which came out on top?
South African consumers have historically opted for Instalment Finance, says Miller, but as economic forces put pressure on disposable incomes, consumers are forced to include a balloon payment to lower their monthly instalments.
“Traditionally, the South African consumer has been plagued with an ownership mentality which leads to the instalment finance option. Consumers feel that they need to own the asset and hence opt for an instalment sale where the asset is paid religiously for the contract term,” adds de Jager.
This may make sense if the asset is then kept after the term. But if consumers pay off a vehicle and upgrade the very next day, ownership is virtually non-existent, and the consumer should look towards a guaranteed future value option.
“There is no perfect option that works for everyone. I am an advocate for guaranteed future value as the option works best for me as I change a car frequently and am risk averse, but I will never own a vehicle,” says Miller.
Other individuals may favour the instalment finance option as they regard ownership as important. Each option has its merits and consumers need to factor in their requirements.
If you're already in a financing option and want advice on how to pay off your financing early, click here.
“I think we will continue seeing a spike in guaranteed future value contracts as consumers move to more modern usership requirements,” adds Miller.
If you’re looking to apply for vehicle finance and become a car owner today, click here.