If you are thinking about purchasing a new or previously owned car, you will have many decisions to make. Unfortunately, choosing the car that you would like to buy is the easy part… Once you’ve calculatedthe true cost of owning a car, you will also need to determine the best vehicle finance option for you…

PARTNERED CONTENT

How to pay for our new wheels… Most of us would look at selecting one of the following options: a cash deal, an instalment, an instalment with balloon (residual) payment, or a lease. One could also weigh up the choice of a guaranteed buy-back deal.motus.cars, supported by Motus Select (previously Imperial Select), helps us understand and explore the various options available to SAcar buyers.

1. Cash purchase

If you can pay cash for your car, it would be the ideal way to buyit! You would own the title to the car and could sell it privately – or to a dealer – when the time comes to dispose of (or replace) the vehicle.

2. Instalment finance

This is the most common – and straightforward – car payment method. You pay off the car in monthly instalments for up to 72 months either with,or without, a deposit.

Monthly repayments are worked out by calculating the purchase price of a vehicle, less the deposit that is put down at the start of the deal.

The lengthier the term, the more interest one would pay. Ideally, you should put down a substantial deposit and structure the loan over the shortest possible time. This way you will ensure that you pay the least amount of interest.

With this option, you will own the car outright after you’ve made your last payment of the contracted instalment term.

What’s more, towards the end of the term, once the settlement balance ofthe contracted instalment term is lower than theprivate sale- or tradevalue of your car, you canstart thinking about replacing it. Should you wish to buy a replacementcar, you could use the price you raise for the vehicle (either by selling it privately or trading it in) minus the settlement balance as a deposit for your nextpurchase.

3. Instalment finance with a balloon payment

Also known as a residual – this option is similar to instalment finance, except a portion of the purchase price is set aside so that the repayments are calculated on a lower amount. Simply put, balloon payments are like deposits except they are payable at the end of a term instead of at the beginning.

Buyers must be careful of the amount put into a balloon because they will be responsible for the lump sum once the finance term is finished. After paying that instalment for all those years, the car is still notyours –that amount that was taken off the full purchase price of the vehicle you bought (to effectively lower your monthly instalmentto something you could afford)is now due.

At that stage, if you don’t have sufficient cash available to pay the balloon/residual and own the car outright, you can either apply to a bank to refinance the remaining amount and the vehicle will hold the title and ownership of the vehicle once you have fully paid off the debt. Alternatively, you can sell the car(provided its private sale or tradevalueis higher than the balloon/residual)and keepthe change.

4. Leasing instead of buying

Leasing a vehicle is just what it says: You pay for the use of a vehicle for a set period and return it at the end of the period.The lease agreement gives you the right to use the vehicle as your own, without owning it. It has its pros and its cons, such as restrictions on the vehicle’s usage, but it also means that the instalments are more affordable.

You can drive a new car every 2to4 years and enjoy the benefits of the latest models. When the lease lapses, you do not have to worry about selling or trading in the car – or settling any outstanding money owed to your bank, for that matter. Monthly repayments are more affordable, and there are no service and maintenance costs as these are covered by the service and maintenance contracts.

On the other hand, lease agreements have strict limitations and penalties, so you need to ensure you get the car serviced at the specified intervals, repaired by approved repairers and adhere to the mileage limits (usually a maximum number of kilometres that you may travel in the car during 12 months) set by the lease provider.

5. Guaranteed buy-backs / Guaranteed Future Value (GFV)

Guaranteed Future Value is becoming a more popular option of vehicle finance in South Africa. Any new car starts to depreciate the second you drive it off the showroom floor, but a GFV planat least determines what the future value of your car will be at the end of the contract term…if detailed terms and conditions regarding the vehicle condition, mileage and maintenance are met.

This means that you will be aware of what your car will be worth once the contract term (usually between 3and 4years) is reached. You are then given three choices – you can either:

Enter another GFV deal and drive away in a new car,Settle the outstanding amount and own the vehicle, orReturn the vehicle to the dealership and walk away (provided you did not exceed the agreed mileage, and the vehicle is in an acceptable condition as stipulated in your plan).

If you do plan on choosing this type of finance, you need to make sure that you read and fully understand the fine print.

Make use of free tools available to further help you decide what the best vehicle finance option is for you. Use these simpleaffordabilityandfinancecalculators to help you determine what you can afford and what finance option will be best for your needs.

Visit motus.cars for more info, or join the conversation on Facebook, YouTube and Twitter.

Related content:

How to calculate true cost of car ownership