The in and outs of vehicle finance

If you’re in the process of shopping around for a new car, you know how expensive a new vehicle can be. And by new, we don’t even mean straight from the factory or high end, but rather used low to mid-range vehicles with at least a dozen thousand kilometers on the clock. Even these are beyond the affordability of the average South African unless their prospective owners are able to secure finance.

So, while it would be preferable to pay cash for such a purchase, the reality is that many vehicle owners have to finance a new vehicle. For those who take this route, Old Mutual offers the following advice.

Calculate the costs involved

For most people, the interest rate of a loan is the biggest deciding factor as it’s one of the most obvious variables affecting cost, but there are other factors that also need to be considered. Fees also play a big part in determining total cost, and you need to take these into account if you’re going to get an accurate total.

Decide on the size of your loan

Don’t. Only accept a loan that you can pay back comfortably. By applying for the largest loan possible, you could risk living beyond your means and defaulting on payments, which would be costly and damaging to your credit score.

Consider the repayment period

This is another area you need to be careful of – while a longer repayment period, and thus lower monthly repayments, is tempting, it also means you’ll pay more overall, because of the extra interest incurred. The best way to approach this is to aim to pay your loan off in the shortest amount of time. The same applies to a mortgage where you’d reduce the total cost if you paid the loan off faster. 

Put down a deposit if possible

If you are able to put down a substantial deposit on the vehicle, do it. If you put down a 30% deposit on your car, you’ll be able to reduce not the cost of your loan, which often means less interest and lower monthly instalments. The bigger your deposit, the lower rate of your loan which leads to cheaper monthly repayments.

Be aware of balloon payments

A balloon payment at the end of your repayment plan can reduce your monthly installments, but then you need to be prepared for the larger payment at the end of the loan term. If possible start saving for this expense as soon you start repayments on your loan. This way you will benefit from the compound interest earned on yours savings

Learn more

For more useful money-related tips, sign up for the Old Mutual Money Mailer. In this free monthly newsletter, you’ll find articles on topics ranging from borrowing to saving and everything in between. If you’ve ever wanted to know how to save for university or how to choose a second hand car, the insights in these article can leave you wiser, wealthier, and better equipped to make the most of your money.

Old Mutual offerings are made available through Old Mutual Finance (RF) (pty) Ltd, a Licensed Financial Services and Registered credit provider (NCRCP35).