Your guide to vehicle finance

What is vehicle finance?

Vehicle finance refers to the different methods available to you to fund the purchase of your new car without paying the full amount upfront. The most common methods include car loans and personal loans.

Vehicle finance and ownership are two important aspects of purchasing a new vehicle, each of them have their own set of benefits and considerations. Understanding these concepts can help you make informed decisions when buying a vehicle.

How it works

A car loan is the most popular method of financing a vehicle.

• A financial institution lends the buyer money to buy a vehicle, and the buyer repays the loan in monthly instalments over a specified period.
• Traditionally, the payment has been up to 72 months. Lately, however a finance term of up to 96 months can be negotiated, but this is not advisable because the car depreciates over an extended period.
• The interest rate granted on a car finance contract is based on risks applied during the credit assessment. A customer can either choose a linked or fixed interest rate.
• A linked interest rate fluctuates as the Monetary Policy Committee (MPC) decides to change the repo rate based on factors like inflation.
• The monthly repayment amount will also change as that rate changes. The lower the repo rate, the better the interest rate that the bank will charge you for the finance granted.
• A fixed interest rate remains constant throughout the vehicle finance contract term. The instalment amount also remains the same. This allows you to budget with greater accuracy, but it also means you can’t benefit when the repo rate comes down.
• The buyer will own the vehicle once the loan is fully repaid.

Getting a Personal Loan for your car

A Personal Loan is a great option if traditional vehicle finance doesn’t fit your needs.

With a Personal Loan, you can borrow a specific amount and repay it over a fixed term. Personal loans are unsecured, which means you don’t need to use the car as collateral, making it a good option for:

• Purchasing vehicles from private sellers. Individuals can only apply for vehicle finance for vehicles up to 12 years.
• Buying older models that don’t qualify for traditional vehicle finance.
• Consolidating the total cost of the car, insurance, and other related expenses into one loan.

Vehicle ownership

Owning a vehicle gives you the ability to sell or trade the vehicle at any time. You can get ownership by buying a vehicle cash or settling the vehicle finance loan in full.

Balloon payments

A balloon payment is a large, lump-sum payment that is due at the end of a loan term.

This payment is typically larger than the regular monthly instalments made throughout the loan period – they are often used in vehicle financing to reduce the amount of the monthly payments, making it easier for consumers to afford expensive vehicles.

Benefits of balloon payments

You have lower monthly instalments – by deferring a sizeable portion of the loan amount to the end of the term, the monthly payments are reduced. The vehicle is more affordable on a month-to-month basis which can be beneficial for consumers with a limited monthly budget who expect to have more financial flexibility in the future.

Another advantage is that it can negate the need for a large deposit – instead of paying a substantial amount upfront, consumers can spread the cost over the loan term and settle the lump-sum payment at the end of the term.

Disadvantages of balloon payments

1. Balloon payments can entice consumers to purchase vehicles that are not in line with their affordability. The lower monthly payments may make it seem like the vehicle is more affordable than it is, leading to potential financial strain when the lump-sum payment is due.
2. Customers who struggle to make the balloon payment might decide to sell the vehicle to settle the balloon, or refinance the balloon payment over a longer term.
3. Since a large portion of the loan amount is deferred to the end of the term, the vehicle's value may depreciate faster than the loan balance is paid. This could lead to the vehicle being worth less than the remaining loan balance, leaving the consumer with negative equity. This may result in the consumer being unable to sell the vehicle or in a short settlement which the consumer must settle in cash when selling the vehicle.
4. Customers pay interest on the full loan amount, including the balloon payment, throughout the loan term. This means even though the balloon payment is delayed, interest will still accumulate on that amount potentially increasing the overall cost of the loan.
5. If the customer decides to keep the vehicle and refinance the balloon payment for an additional period, they will pay interest again on the refinanced amount – further increasing the total cost.

How a deposit can lower your monthly payments

A deposit reduces the overall loan amount, which can lead to lower monthly payments. This reduction can make the monthly instalments more manageable and affordable. Interest is calculated on the principal amount; a smaller loan amount means less interest accumulates over time. Putting down a significant amount upfront decreases the initial amount that needs to be financed.

A deposit can:

• Improve your chances of loan approval  – lenders often view borrowers who can make a substantial down payment as less risky because the borrower has already invested a significant amount of their own money into the vehicle.
• Help you avoid negative equity, which occurs when the value of the vehicle drops below the outstanding loan balance. By paying a deposit, you start with a lower loan amount, which can help you stay ahead of the vehicle's depreciation curve.
• Give you more negotiating power. When you have a large amount to put down, you may be in a better position to negotiate the terms of the loan, such as the interest rate or the loan period.

Our vehicle finance calculator can give you an idea of your instalment amounts based on aspects such as the term, interest rate, deposits and balloon payments.

Drive off in your dream car with an Absa Vehicle Finance loan or a Personal loan.