First-time car buyer's guide
My Money Matters | Written by Absa Staff Writer
You’ve recently graduated, started a new job, moved to a new town or city, grown tired of the public transport system, or are just looking to upgrade the old car handed down to you. You are ready to buy a new set of wheels. You’ve probably started doing the research and still have a couple of questions about getting a car. Here’s a guide to help you demystify the financial side of buying a car.
Your finances
Your budget is one of the first considerations, as well as how much you can afford to buy a car. If you decide to finance your car through the bank or another financial provider, you’ll probably try a finance calculator to see how much you can afford based on your income. Your monthly income less expenses will equal the income remaining that can be used towards the vehicle. Using that disposable income as an estimate of the instalment that you can afford, can also help you work back to the vehicle price that you can afford. Buy a vehicle within your means to avoid strain on your budget.
How you’ve been managing your other financial obligations will also play a role in determining your affordability and influence the bank’s decision in assisting you on what credit amount you qualify for. You can get a free credit report annually from a reputable credit bureau to check your credit score and status. The report can be used to pick up any issues of identity theft and incorrect accounts that will have a negative impact when your financial application is assessed. The credit score provides an indication of how likely you are to repay your financial obligations – it’s always better to have a good score.
Many customers are declined for finance because of their affordability, which is affected by the income, expenses and how financial commitments are treated. Be mindful of these factors when deciding to buy a new car.
Deposit or balloon?
Now that you’ve looked at your budget and credit score, you can decide how exactly to finance your car. There are two options available: you can either pay a deposit or take a balloon payment on the car finance contract.
“There ain’t no such thing as a free lunch” a common economics quote, which highlights that each decision has a cost implication. Deciding to pay a deposit towards your car will mostly likely require you to delay the car purchase until you’ve saved enough money to use as a deposit. The balloon payment is a lump sum payment that is paid at the end of your car finance contract term.
Both options will have an effect on your cashflow by reducing your instalment amount.
Here’s how it works:
| With balloon | With deposit | |
| Car loan amount required | R300 000 | R300 000 |
| Deposit | R0 | R30 000 |
| Repayment term | 72 | 72 |
| Interest rate | 9% | 9% |
| Balloon % | 25% | 0% |
| Balloon amount | R 75,301.88 | R0 |
| Repayment amount | R4,705.83 | R 4,957.66 |
| Total interest and fees payable | R 112,914.44 | R85,744.08 |
You will require just over 6 months of instalments to save up for the deposit.
An upfront deposit payment means that you end up borrowing less money from the bank, which indicates that you can manage your finances and could make them grant you a more favourable interest rate.
The balloon payment is a lump sum payment required at the end of the finance term. It may also take long to reach your break-even position, where the value of the car is equal to the total outstanding balance on your loan. This will also be payable if you trade in the old vehicle before reaching the break-even position.
You should ask yourself how you would pay for the balloon amount when it becomes due. Your expenses might have increased by the time that the payment becomes due. Another option to cover yourself long before the due date is to save towards the balloon amount.
Fixed vs linked interest rates
The interest rate granted on your car finance contract is based on a number of factors 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 such as inflation. The monthly repayment amount will also change as the rate is changed. Interest rates can be expected to change quarterly, or can remain flat for some time. The lower the repo rate, the better the interest rate that the bank will charge you for the finance granted.
A fixed interest rate may be higher and it remains constant throughout the vehicle finance contract term. The instalment amount also remains the same, allowing you to budget with greater accuracy.
Choosing how to finance your car
The more popular ways to finance a car is through a car finance loan, cash or through a personal loan.
- The personal loan option attracts a higher interest rate because the loan is unsecured, and the term differs from a car loan.
- A car loan is secured, has lower interest rates and some banks do finance for longer periods. The car becomes easily tradable, as the finance for the old car can be transferred to the new car. The conditions of the loans also differ, for instance, a car loan has comprehensive insurance for the car as a condition and full ownership of the car is transferred once the car loan is paid off.
- Another option is to pay cash for the car and have full ownership of the car immediately. You pay no interest to the bank and it’s generally a quicker process.
A car loan will give you more vehicle options, depending on your affordability.
New vs used cars
When buying a car, you will be confronted with the decision of whether to buy a brand-new or a previously owned car.
With a new car, you get an opportunity to choose all the specs on the car, however, you can expect to pay more for the vehicle. Although a new car depreciates at a faster rate, it comes with other benefits such as a manufacturer warranty and requires less repairs. The car is also likely to come with a service and/or maintenance plan.
A previously owned car will cost less and depreciates at a slower rate, but may require additional attention through additional repairs and maintenance, depending on the condition of the car. Some pre-owned cars may still have a warranty (coming to an end) but you will have to purchase a new warranty along with a service and maintenance plan as additional items.
There are offers that one can take advantage of, such as manufacturer discount deals on new vehicles or the dealer offering free service and maintenance on used cars. Spend some time doing research to find the option most suitable for you.
Other costs to consider
Finally, when looking at that new car, also consider that you will need to have the car insured through comprehensive insurance from an insurance provider. You need to budget for petrol that has fluctuating prices, annual licence disk renewal, you may start paying for parking where you live or work and you’ll need to regularly service and maintain your car through a professional dealer or service centre.
Getting a car isn’t just about getting finance or the actual vehicle, it comes with added responsibility, but once you’re clear, it should be fairly easy to keep your shiny wheels in good condition.
What are the specific requirements to obtain finance and how can the process be made easier?
- Have all the documents ready. These include your ID, 3 months’ bank statements, proof of income (latest three payslips), driver’s licence, and proof of residence.
- You can apply online here, call our vehicle finance center on 0860 669 669, in person at the dealership or at an Absa branch.
- Get a quote from the dealer if applying for yourself through the bank.
- Start looking for a suitable comprehensive insurance policy.
- Lastly, be ready to have your car finance finalised and collect your car.
Buying and owning a vehicle is a long-term decision, and we want to help ensure that you make an informed one.
To calculate how much you can afford based on your income you can try our finance calculator, click here.
If you have already spotted your dream car and would like to apply for finance, click here.
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Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.
