Start your journey to vehicle ownership with the help of our Street Smart video series, brought to you by Absa Vehicle Finance. In the first instalment, Fulufhelo Mandane from Absa discusses what you need to consider before you start shopping, the costs of ownership and your various finance options.

You’ve recently graduated, started a new job, are moving to a new town or city or grown tired of relying on the public transport system and you’re now 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…

We asked Fulufhelo Mandane, Absa’s head of dealer relations for Gauteng and Limpopo, to answer a number of questions to help demystify the financial side of buying a car…

What do you need to consider when car shopping?

Mandane: Your monthly budget, the amount of money you’ve saved up and the cost of the car you’d like to buy are among the first considerations, as well as the amount you can afford to buy a car. If you decide to finance your car through the bank or another finance provider or lender, you’ll probably try a finance calculator to see how much you can afford based on your income.

Your monthly income minus expenses will equal your disposable income, which you can use as an estimate of the instalment you can afford and provide clarity on the price of the vehicle you can buy while still living within your means. Bear in mind that many customers are declined for finance because of their affordability and how well they maintain their financial commitments.

How you’ve been managing your other financial obligations will influence the bank’s decision on the credit amount you can realistically afford. Annually you can get a free credit report from a reputable credit bureau to check your credit score and status. 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.

Car finance comes with a set of items to consider such as the total cost of owning a car and paying a deposit or having a balloon at the end of the contract. What are the cost implications?

Mandane: Once you’ve looked at your budget, savings and credit score, you can decide how to finance your car. You can either pay a deposit or take a balloon payment as part of the finance contract.

The first option means you will probably have to delay the car purchase until you’ve saved enough money to use as a deposit. An upfront deposit payment means you end up borrowing less money from the bank to buy the car and they may grant you a more favourable interest rate.

The balloon payment is a lump sum payment that you must pay at the end of your car finance-contract term to settle the loan, but it will attract more interest and fees. It may also take longer to reach your break-even position (where the car’s value is equal to your loan’s outstanding balance). This will be carried over to a new car if you trade in the old one before reaching break-even position.

A question to ask yourself is “how will you pay for the balloon amount when it becomes due?”Your expenses might have increased by the time the payment becomes due. Another option to cover yourself long before the due date is to save towards the balloon amount.

Loans can be optimised to suit a customer’s affordability, what are the options for a car loan?

Mandane: The interest rate granted on your car finance contract is based on a number of risks applied during the credit assessment period. A customer can either choose a linked or fixed interest rate.

A linked interest rate fluctuates as and when the Reserve Bank’s Monetary Policy Committee decides to change the repo rate. Consequently, your loan’s monthly repayment amount will change as the repo rate is changed. Changes can be expected quarterly, or the rate can remain flat for some time.

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.

A minimum term of 24 months or up to 72 months can be chosen to repay the loan, with the term of the loan affecting the monthly repayment amount.

Which finance option is better?

Mandane: The popular ways to finance a car is through a car finance loan, cash or through a personal loan.

A personal loan option attracts a higher interest rate because the loan is unsecured (the lender doesn’t retain the title to the car as security) and the term is usually shorter than a car loan. Because a car loan is secured, it is usually offered at lower interest rates and over longer contract 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 take full ownership of it immediately, plus you pay no interest to the bank, but a car loan will give you more vehicle options depending on affordability.

Always read your contract and understand the terms and conditions for your own benefit.

What else needs to be considered in the total cost of owning a car?

Mandane: One of the conditions of being granted a car loan is that you will need to have the car insured through comprehensive insurance from an insurance provider. You also need to budget for fuel (of which prices fluctuate), annual license disc renewal, parking costs (where you live or work) and you’ll need to regularly service and maintain your car through a professional dealer or service centre.

Related content:

The New Normal, Podcast 3 – Time to revise your car insurance?

The New Normal, Podcast 2 – Car Dealerships of the Future

The New Normal, Podcast 1 – Changes in SA’s car-shopping patterns