How to get the right vehicle finance deal

What is a balloon payment and what kind of interest rate are you likely to get when you take out vehicle finance? Angelique Ruzicka finds out all you need to know about getting a car loan.

Whether you buy a car new or used, it’s a long term commitment and you have to make sure that you make the correct decisions to suit your pocket. Most people may become hung up on the type of vehicle they get, but weighing up the financial considerations that enable you to drive away in your dream ride are far more important. Here are just a couple of things you need to know and ask about before you take a car off the showroom floor:

1. Ensure that you are getting the right deal.
The interest rate you get awarded is based on several things including your credit worthiness, whether you can afford the loan and your general standing, i.e. how long you’ve worked for your employer and how long you’ve lived at your address for. The bank will also look at the type of vehicle financed and what the value of the car is.

2. Shop around for the best deal.
Repayment periods can vary too and you can obtain a loan for between 12 and 72 months but generally lenders provide car finance over a 60 month term. If you’ve been a loyal client to a particular bank you could try and negotiate a better rate. “There are various ways of obtaining vehicle finance. You can ask the finance consultants at the dealership to help you. They are trained to handle finance queries and can compare quotes and secure the right rate. You can also go directly to a vehicle finance company’s website or phone them and negotiate the rate yourself,” says Christ de Kock, executive head of sales and marketing for Wesbank.

There are ways of ensuring you are looked upon more favourably by a lender and one of the ways to do this is by putting down a deposit. Remember that the more a bank is exposed the more risk it takes on. If you therefore have no deposit you will more than likely secure a higher rate from the bank. So if you can, make a contribution towards the loan.

Take a look at our guide on how to improve your credit score for more information.

3. Make sure the loan suits your needs.
If you prefer to know what you will be paying every month you may want to opt for a fixed rate loan. Fixed rate loans stay the same whereas variable rates are linked to the prime rate and can move up and down accordingly. However, the downside is that fixed rates are not as attractive as variable ones. Fixed rates range from 10-17% whereas variable rates range from 9-15% currently.

4. Try to get pre-approved for a car loan before you go car shopping.
“This way you will know what you can afford rather than be enticed by a vehicle that costs more than what you would normally go for,” advises de Kock.

5. Make sure balloon payments are right for you before you agree to them.
You can arrange for a balloon payment, whereupon a final and higher installment is paid at the point at which the loan term ends. While this may sound like a good idea, as this reduces your monthly installments, you’ve got to ensure that you are able to stump up the money for the lump sum at the end of the term. “I would definitely not recommend them,” says de Kock. “About 10% of our clients elect to go down this route. You either have the option of paying off the balloon or refinancing by trading in the vehicle and getting another car. However it takes much longer to repay the loan this way particularly if you refinance the balloon payment. You could end up in a situation of borrowing over the value of your car if you keep refinancing.”

6. Be careful about taking on ‘extras’.
Above all, make sure that you research and compare prices of associated services or products as sales people may approach you about these too. “You will be offered other products when you go to a dealership such as credit life and credit shortfall insurance. Be prepared for this and understand the costs and benefits of these products,” says de Kock.

Gari Dombo, managing director at Alexander Forbes Insurance, adds that you can opt to have products added to the vehicle finance loan, but he advises against this. “It is a much better idea to consider purchasing these types of covers from your own insurer and not to borrow the premiums from a financier where interest payments make the long term cost higher,” he advises.

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