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Buying a new car and the stress that comes with it

30.06.2014

WE ALL want to be mobile and in a place like South Africa this means having your own form of transportation is critical due to the lack of public transport infrastructure.

Admittedly the Gautrain has made public transport a reality to some extent but it’s limited in its ability to serve the masses.

This is why many South Africans still believe it’s a necessity to own your own car and an expensive necessity it is.

Factoring in things like repayments, insurance and fuel costs is enough to leave one sobbing when looking at your bank statement at the end of the month.

But as Wesbank points out, the latest data shows that more buyers, in both the new and used car markets, are opting to structure their monthly repayments at a lower rate as they try to keep their monthly costs down.

The result is, buyers find themselves falling into a debt trap by opting for residuals and balloon payments, as well as financing their cars over a longer period than we’ve traditionally seen. This is thanks to the implementation of the National Credit Act (NCA).

The problem with vehicle ownership in South Africa is that cars are an extension of ourselves. We customize our cars to suit our personality; we buy flashy vehicles so that our neighbours know we’ve arrived.

Like Rudolf Mahoney, head of research at WesBank, explains: “Consumers can sometimes be led by their heart, rather than their head, when shopping for cars, but they should resist the urge to splash out and get a vehicle that’s not in their price range,” he says. “They should carefully consider the repercussions of structuring their deals simply to have lower monthly payments, because they will ultimately end up paying a lot more.”

The demand for balloon payments came into being in 2007 and since then has grown by about 60 percent as currently one in every five financed deals now include a residual payment.

The traditional finance period of five years or 54 months has also seen an increase to a longer period with the average being 68 months.

South African motorists also seem to be rotating their vehicles more frequently. Gone are the days where we hung onto our ride until it clocked well over 300 000km and then gets passed down from generation to generation.

So since the buying patterns of the South African public are changing, how can those in the market for a new car prepare themselves to save money in the long run?

WesBank has put forward three simple tips to consider when purchasing a vehicle.

First off, avoid the all-alluring balloon payment. Wesbank states that a balloon payment of 20 percent on a vehicle of R240 000 will result in monthly repayments of R4 739.58 (over 60 months, at 11.5 percent interest). At the end of the finance term the repayments total R284 374.84. However the buyer will still owe a 20 percent balloon payment - or R48 000 - thus bringing the total price of the vehicle to R332 374.84.

If the owner trades in their vehicle, the outstanding balloon amount will be subtracted from the trade-in price. If the owner chooses to keep the vehicle they can pay the amount as a lump sum or finance the outstanding amount, thus incurring further costs.

For a finance deal with no balloon payment the same vehicle would incur monthly repayments of R5 335.23 (over 60 months at
11.5 percent interest), resulting in a total repayment of R320 113.55 - or R12 261.29 less than the deal with a balloon payment.

Secondly, financing your vehicle for the shortest possible period might seem like a good idea to pay as little as possible for a vehicle over a set period; the longer you’re paying a car off, the more you’re paying for it. It’s simple mathematics.

For example, consumers can also save in the long term by opting for shorter repayment periods. The same R240 000 vehicle, financed at 11.5 percent interest over 72 months, will result in a monthly repayment of R4 686.88. The repayments will total R337 455.18.

However, opting for a 54-month contract will save a buyer R25 821.80, with monthly repayments of R5 770.99.

Opting for a shorter repayment period also means the deal is repaid sooner. According to Wesbank, buyers who make use of longer contract periods will have to wait longer before the outstanding financed amount is less than the vehicle’s market value. The final tip is paying a bigger deposit. The more money you put down for a vehicle, the smaller your monthly repayments will be.

Wesbank reveals by paying a deposit on a vehicle a buyer reduces the capital amount financed by the bank, and will thus pay less in interest. It is possible to purchase a vehicle without a deposit, subject to approval, but any size deposit will help reduce monthly repayments, without the disadvantages of a balloon payment.

It is also advised to pay for any extras up front, to avoid paying finance fees and interest by financing these as part of the deal. This includes aftermarket accessories such as tow-bars, canopies and bicycle racks.

Due to tough economic times, we, as consumers, have to educate ourselves in order to make our hard-earned rands go further than ever before and by being a smart buyer it will ease the pressures later.

Article written by Stuart Moir
30.06.2014
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