Financing your car

Buying a car constitutes a huge capital outlay for most of us and sometimes, we are not 100% sure on what car financing fully involves.

While we all want the best car we can afford, packaging the transaction to best serve your financial needs will save you thousands over a period of time. Gumtree SA’s Key Accounts Manager, Jeff Osborne, enlightens you on all things car finance.

The deposit

There is no hard and fast rule when it comes to how much deposit is required when purchasing a car. Some financial institutions will finance your car if at least 10% of the price of the car is paid for upon initial purchase. “By far the best way to pay for a car is to pay for it fully in cash – you’ll save thousands in interest and won’t be locked into a financial agreement”, says Osborne.

Interest and loan period

The purchase price of a car is one thing, but the interest on it could amount to an additional 40%. For example, the price of the car you want is R100 000. If you finance it over a period of 72 months (6 years, the maximum allowed in SA at this time) at a rate of 12.5%, your instalment is roughly R1970 a month for a total of around R140 000 over 6 years. The R40 000 is pure interest.

The danger of residuals

In order to make a new car as affordable as possible, South African financial law allows for a residual value to be placed on a car. It can be as high as 40% of the original value of the car and is only applicable when a finance plan is applied for when purchasing.

A 40% residual on a R100 000 car is R40 000 – meaning the buyer only needs to pay the balance of R60 000 straight away. But at the end of the agreed finance period, probably between 3-5 years, the R60 000 plus interest will be settled and the owner still needs to pay the dealer the R40 000 plus interest, payable immediately.

But one benefit of residuals “are that it makes buying a car more affordable in the short term, allowing you settle the bulk of the payment when you can afford to do so”, continues Osborne.

There is an extensive amount of into you need to know before purchasing a car and locking yourself into a financial agreement you cannot break so be sure to consult someone knowledgeable before making a final decision.