With year-to-date passenger car sales continuing to show great strength, the National Automobile Dealers’ Association (NADA) is emphasising the importance of understanding the different vehicle finance options available to ensure buyers make the right decision that suits their bespoke needs.
“The excitement of a new car shouldn’t overshadow the need for prudent financial planning,” says Brandon Cohen, National Chairperson of NADA. “Car buyers in South Africa have several finance structures to choose from, and each has unique implications for monthly payments, total interest paid, and eventual ownership. We urge all consumers to weigh the pros and cons of each option against their personal budget and future plans so that they enjoy their motoring experience both in financing and driving.”
Key Vehicle Finance Options Explained
Traditional Instalment Sale
This is the most straightforward and common form of vehicle finance. The financier, usually a bank, lends you the full or partial purchase price of the vehicle, and you repay the total amount, plus fees and interest, in monthly instalments over a set term – usually 72 to 84 months. The bank becomes the titleholder of the vehicle and retains the vehicle registration papers until the final payment is made.
Pros
- Clear ownership path: You own the car on purchase and obtain title and papers to the car once final payment is made.
- Flexibility: You can elect to fix the interest rate for the full term of the agreement or link the rate to the prevailing rate issued by the Reserve Bank, as well as decide upfront on the length of finance that works for you. You can also choose to either pay for your ‘on-the-road’ costs separately or as part of your finance contract.
Cons
- Interest Rates: Fixed rates may be higher than a falling interest rate cycle, and conversely, linked rates could see higher finance costs in a climbing rate cycle.
- Equity: If the vehicle is financed over longer periods but you want to trade in early, the amount owing on the vehicle may outweigh the sales or trade-in value of the vehicle.
Balloon Payment or Residual Value
With a balloon payment, a large portion of the purchase price – referred to as the “balloon” – is deferred until the very end of the finance term. Monthly instalments are then calculated on the reduced amount, making the instalments lower than a traditional instalment sale. At the end of the term, you must pay the balloon amount in full. This usually requires either refinancing the balloon, paying cash, or trading in the car.
Pros
- Lower monthly payments: Improving short-term affordability.
- Clear ownership path: You own the car on purchase and obtain title and papers to the car once final payment, including the balloon lump sum, is made.
- Flexibility: Offers the same level of payment flexibility as a traditional instalment sale agreement.
Cons
- Lump-sum risk: You must save up for the large final payment or be prepared to refinance.
- Equity risk: The longer finance term means the amount owing on the vehicle may outweigh the sales or trade-in value when you choose to sell or trade in the vehicle.
Guaranteed Future Value (GFV)
With a GFV plan, the financier guarantees what the vehicle will be worth at the end of the term, based on mileage and vehicle condition. This guaranteed value acts as a form of balloon payment, with the monthly payments based solely on the difference between the purchase price, along with interest, and its guaranteed future value. At the end of the term, you have three clear options: trade in the vehicle for a new one, refinance the GFV amount, or return the vehicle.
Pros
- Lower monthly payments: Improving short-term affordability.
- Predictable upgrade cycle: Perfect for those who want to drive a new car every 3-4 years without the hassle of selling.
Cons
- Strict terms: There are usually limits on mileage and vehicle condition. Exceeding these lowers or can even remove the GFV.
Step-Payment Plan
Available from select banks, this option is designed to assist buyers who expect their income to increase over the finance term. The monthly repayments start lower and then increase after a predetermined period.
Pros
- Immediate affordability: Ideal for recent graduates or those expecting a guaranteed salary increase.
Cons
- Risk of income stagnation: If your expected income increase doesn’t materialise or if interest rates increase at a fast pace, the higher later payments could cause financial stress.
“As you head to the dealership to take advantage of incredible vehicles, new models and great specials, remember that the finance option you choose is as important as the vehicle you buy. Do your homework, budget within your means, and don’t sign anything until you fully understand the total cost of credit and terms of ownership. Speak openly with the Finance and Insurance (F&I) Manager at the dealership, who is a trained professional and can guide you toward the best solution for your personal financial circumstances,” concludes Cohen.
