How to choose the right vehicle finance for your needs

Few things in life can rival the joy of buying a new car. Getting behind the wheel, however, requires a level of liquidity or financial muscle most people don’t have.

To bridge this affordability gap, banks have developed a number of vehicle finance products and services to suit different customers’ needs.

Here we unpack the three most popular finance options:

Instalment finance

This is the most common of vehicle finance options. Monthly repayments or instalments are calculated on the purchase price of a vehicle minus whatever deposit is put down by the buyer at the start of the finance contract.

Finance is structured in terms of between 12 and 96 months. The longer the term, the lower the monthly repayment, but there is interest to consider, which is charged until the end of the contract.

Instalment finance with a balloon payment

The instalment finance contract with a balloon payment is similar to traditional instalment finance except that a portion of the purchase price — up to 35% — is set aside until the end of the finance term.

This is done to bring down the monthly repayments as they are calculated on a lower amount. Simply put, a balloon payment is similar to a deposit, except that it’s payable at the end of a finance term instead of the beginning.

“Buyers must be cautious of the amount put into a balloon because they will be responsible for the lump sum when the finance term comes to an end,”  said WesBank marketing and communication head Lebo Gaoaketse. 

“Customers also need to be aware that interest on a balloon payment finance contract is calculated on the full vehicle purchase price, including the portion set aside as a balloon amount.

“It is advisable for customers who choose the balloon payment option to set aside some of the funds they save on monthly instalments to ensuring readiness for the balloon payment when it falls due.”

Where the customer is able to settle the balloon amount at the end of the finance term, no further interest is charged on the balloon amount. Alternatively, the balloon amount can be refinanced and interest will be calculated for the new finance contract and charged from the start until the end of the new finance contract.

Guaranteed future value

Guaranteed future value (GFV) is becoming a popular form of vehicle finance in South Africa. As a vehicle ages, its value starts depreciating from the moment it leaves the showroom floor.

In line with this depreciation, a GFV plan calculates what the future monetary value of a vehicle will be if specific conditions are met, including mileage and maintenance. This future value is guaranteed at the start of the agreement.

This makes planning ahead easier as the customer knows what their car will be worth once the predetermined contract term (usually between three and four years) ends.

The customer is then given three choices — they can:

• enter into another GFV deal and drive away in a new vehicle;
• settle the outstanding amount and own the vehicle; or
• return the vehicle to the dealership and walk away, provided the driver didn’t exceed the allotted mileage and the vehicle is in good condition.

“With a GFV contract the consumer is only paying for the use of the vehicle. This is why it’s important to know more or less the distance the vehicle will travel during the GFV term. Penalties may be incurred if the conditions of the GFV contract are not met,” said Gaoaketse.

“Regardless of which finance option is chosen, it is important to carefully read the contract before signing on the dotted line. Remember any value-added products and services, such as an extended service or maintenance plan, anti-smash and grab film, a canopy or aftermarket rims added to the finance contract, will affect the monthly instalment and may attract interest.”