The majority of South African drivers cannot afford to buy their cars outright and rely on banks to loan them the money.
There are however a few different options when it comes to the way vehicles are financed, so how do you know which one is best for you?
South Africa’s leading vehicle financier WesBank has outlined the three main choices available to car buyers when applying for vehicle finance, to help them understand the differences and make better informed decisions.
“Uncertainties about the economy and the stability of personal incomes mean household budgets are tight at the moment and many South Africans are choosing to pinch pennies,”
says Ghana Msibi, CEO of WesBank Motor Division.
“However, for those in the car market, right now is actually a great time to buy thanks to the current low interest rates combined with some tasty offers from car dealers around the country. WesBank has some handy pointers to guide car shoppers through what could be unfamiliar territory with regards to the flexible finance options available to them.”
This is a convenient solution designed to assist the buyer with cash flow at the start of a finance agreement.
A portion of the purchase price is set aside in order to lower monthly repayments, but it’s important to remember this deferred amount will still be owed to the bank at the end of the contract term.
Balloon payments require discipline to be used effectively, and customers opting for this arrangement should make sure they’re saving enough cash every month to settle the debt once the instalment period is complete.
Think of a balloon payment as a deposit, but one that’s put down at the end of the contract term instead of at the beginning.
Depending on the size of the balloon, the money saved on the monthly payments should more than cover the cost of interest for a loan to refinance the lump sum of debt at the end of the term.
In other words, saving the money yourself while driving the financed vehicle could be cheaper than it would be to apply for another bank loan to pay off the outstanding debt owing on the car.
“While the benefits that come with keeping monthly costs down may be extremely appetising, it is important not to view a balloon deal as a way to get into a car you simply cannot afford,”
says Msibi. “A looming lump sum after years of driving a vehicle is easy to ignore and forget, but settling that debt is ultimately the responsibility of the buyer. That said, a balloon payment has some great advantages if used properly.”
Guaranteed future value
Guaranteed future value, better known as GFV, is a form of finance suitable for drivers more focused on vehicle ‘usership’ than ‘ownership’.
Simply put, GFV offers customers a clear indication of the future monetary value of their car to make planning ahead easier, but it does come with some mileage and maintenance restrictions, which need to be adhered to.
GFV is best suited to customers who stick to a regular driving routine and have a good grip on the distances they drive annually.
At the onset of a GFV deal, the customer and the bank will agree on maximum distances to be travelled with the financed vehicle over the term (usually three to four years), as well as some guidelines about acceptable wear and tear.
At the end of the pre-determined contract term, GFV customers have three choices: they can either enter into another GFV deal and drive away in a new vehicle, settle the outstanding balance to own the vehicle, or simply return the vehicle to a respective dealership and walk away.
It’s important to remember, however, that there may be penalties if the vehicle has exceeded the allotted mileage and/or been returned in an unacceptable condition.
“GFV finance is similar to a balloon payment, except the residual value held over until the end of the term is guaranteed by the bank. This means less risk and more options for the customer, as the outstanding amount set aside at the start of the agreement can be refinanced, settled with cash or walked away from. But, as with any contract, it is important for the customer to read and understand the fine print before signing on the dotted line.”
Instalment sales are by far the most common and simplest of the vehicle finance options.
Monthly repayments are calculated on the purchase price of a car, and payment terms can be structured into time frames of between one and six years.
The longer the term, the lower the monthly instalment will be, but it’s important to remember that interest will increase proportionally to the length of the contract.
As such, the total amount repaid to the bank will be more for a longer loan period than a shorter one.
“Instalment finance agreements come with fewer restrictions such as mileage and the condition of the vehicle, but monthly repayments will naturally be a bit more. The extra monthly cost does, however, pay off in the long run because once the payment term is concluded, the customer owns the car outright,” explains Msibi.
“One of the most important pieces of advice WesBank has for customers, regardless of which of the three finance options is chosen, is to begin with a healthy deposit. Any money put down upfront will automatically mean lower monthly instalments and less interest, combined with a lower outstanding balance at the end of the contract in the case of balloon payments or GFV deals.
“Any dealership that offers finance through WesBank has a registered Finance and Insurance (F&I*) consultant to guide buyers and explain the different finance options,” concludes Msibi. “These experts can propose which option is most suitable for each respective customer and will offer financially sound advice on what you can and cannot afford,” says Msibi.
The recently launched WesBank App also offers customers an efficient and immediate tool to check affordability upfront, apply for vehicle finance, receive approval to qualify, customise their own deal terms and even sign their vehicle contract, all in a matter of minutes.
The WesBank App is available for download from the Apple App Store (iOS) and Google PlayStore (Android), for all WesBank customers, current or new. The WesBank App features are also housed on nav>>Car, so FNB customers can access the WesBank App directly through the FNB Banking App.
* All F&I consultants are regulated by the Financial Advisory and Intermediary Services (FAIS) Act and the National Credit Act (NCA).