There are various ways to finance the purchase of a new car:
- Pay for it in cash
- Finance through your own bank through a vehicle loan
- Finance through your own bank through a private loan
- Finance through the dealership
You want your new ride to be as easy on the pocket as possible, so Rule Number 1: do not buy more car than you can afford. Draw up a budget in terms of what you can afford outright in cash or a monthly instalment, and buy according, always assuming you leave some margin on the safe side for when interest rates rise unexpectedly.
Put down as much cash as you can, keep the instalment period as brief as possible, and have enough in reserve for insurance and running costs like fuel, servicing and wear items like tyres.
By paying cash for a car you immediately save thousands in interest costs in the long run. This remains the best way to buy a car – by the longest shot. In fact, there is a saying: the best car is a car that is paid for.
When signing to purchase a car at a dealership, don’t wait until that moment to think about financing it. Get pre-approved finance options (and approval) from various financial institutions before you go shopping. You need not only call your own bank – shop around at rival banks, who may be glad to take your business at a preferred rate. Compare the options of a vehicle loan to that of a private loan, as the interest may favour one or the other, and find out about how lump sum payments and early termination will affect the interest and payment period. You may win the Lotto or a favoured aunt may pass away – the point is, your financial position may change overnight and you do not want to be locked into an agreement you cannot exit for an extended period of time.
Listen to what the dealer has to offer. Often the dealer’s options may be more expensive than you own quotes, but dealers have access to different financial suppliers of their own and may offer you even better rates. You may even use your pre-approved loans at a predetermined rate in negotiating a better one through the dealer.
The point is to be prepared so you could make an informed decision about your purchase.
Do the math
Keeping the instalment period as short as possible will not only result in you paying off your car outright as quickly as possible, but will save thousands on interest fees in the long run.
You may baulk at the figure of a high instalment, but use the calculators below and experiment with calculations over different time periods and determine what the car will ultimately cost you.
Since a car is not an investment and can depreciate rapidly, this figure could drop faster than what you could repay the loan, a consideration especially if you pay over an extended period like 60 or 72 months.
Lastly, when agreeing to finance, determine whether the interest rate is a fixed one or whether it is variable, i.e. your instalments will fluctuate higher or lower in line with current market trends. Fixing the rate will result in you paying a set figure each months, i.e it will not move up or down for the duration of the agreement, regardless of what the markets are doing, but normally this rate is higher than average. Having an open interest rate will leave you vulnerable to rate fluctuations on the negative side for the entire period – who knows what rates will be in three, four or five years? – but could also be to your advantage when rates come down.
Try one of the online calculators to determine how much payment you could comfortably afford, taking into account deposits (if any), various interest rates and various periods of time: