It is a common practice all over the world to seek financing in order to purchase a personal car. It is called Car Financing. The goal is to help you buy the car and then receive the payments from the buyer in small installments spread over time. So many banks and other financial institutions offer car financing opportunities in South Africa, but these services are not free and that’s where the vehicle finance interest rate South Africa comes in.
Car Financing is a kind of loan, and so it comes with some interest which is paid into the installments of the payments. This is the major point to look out for when considering the option of getting a Car Financing loan. This is because a good deal with a lenient interest rate will help you buy a car and live comfortably, while an unfriendly interest rate is just another form of the wrong one to pass through unreasonable levels of stress for the fleeting pleasure of having a car.
There is no need to fear; as long as one is employed or has a steady income, it is possible to get vehicle financing. Just ensure that the offer is flexible, has a low-interest rate, and will not impose an undue financial burden on you- causing you to compromise other important aspects of your life such as healthcare, and other expenses.
Here are a few important things to note when considering car finance interest rates in South Africa:
Vehicle Finance Interest Rates In South Africa
The Interest Rate of your Car Finance Agreement
The interest rate is more than a figure; it can define whether or not you are going to sleep well after signing the contract to have your car purchase financed. If the interest rate is too high, you will find yourself straining too hard to pay off your car loan.
There are a few variants to this particular factor: interest rates have a few different types.
A fixed interest rate means that the interest rate will be the same for the entire duration of your agreement. This is useful because you can better plan your expenses, and will not have to worry about any increases in rates. This is an easier finance option; you already know how much is going out of your monthly earning in order to facilitate the payment of the loan. This is beneficial in an unstable economy where prices of one’s basic needs can suddenly go high. It would become extremely uncomfortable to have to worry about extra fees for a car.
Linked Rate is the second option in car finance interest rates. A linked interest rate is linked to the prime lending rate of a country at any time. So if the prime lending rate of South Africa decreases at any point during the duration of time when you must repay your car finance, then your monthly installment will decrease accordingly. If the reverse is the case, and the Prime Lending Rate increases, then your monthly installment will do the same.
Disclaimer: a Linked Rate contract can be very stressful, especially if one is on a tight budget. Therefore, only consider linked interest rates if you have some breathing room in your budget: that is if you have extra money as savings, or if you do not have many other expenses or financial commitments.
It is very important to ask questions before committing to any car financing agreement. Please ask the simple question: ‘is this a fixed rate, or a linked rate?’
The Finance term of your car loan agreement
The vehicle finance term is the period of time over which you will pay back the car loan. But it is more than that; it is also how much you will pay monthly. For example: if a bank gives you 12 months to pay a car loan then you may have to pay R5000 a month, whereas if you were given 24 months to pay off the same loan it would amount to R2,500 a month.
In South Africa, it is common to find car finance terms that range between 12 and 72 months.
Let us do some examples:
If you finance a vehicle purchase of R200 000 over a period of 60 months and you are given a 10% interest rate, then your total finance amount will be R254 964.60, which amounts to R4249.41 per month.
If you finance the purchase of that same car but over a longer period of 72 months at the same interest rate of 10% then your total finance amount will be R266 722.24 which amounts to R3705.17 per month.
If you paid attention you would notice that a longer tenure warrant smaller monthly payments, but when those payments are summed up together they become larger than the shorter term payments. In other words, while the short-term payments may be very stressful to pay, they may be the cheaper option in the long term.
A balloon payment is an arrangement to shift a percentage of the car loan to the end of the term. Therefore, you make a big deposit, pay lower monthly installments, and then pay a big one at the end of the term. This works because your monthly payment is calculated on the loan amount minus the balloon amount.
It is a good idea for those who have investments they are banking on, but cannot immediately access those funds. So they may sign a car finance agreement, pay the low monthly fees, and when the investment matures, and they have the money at hand, they can go ahead and pay the balloon amount, thus ending the car finance deal.
Example: Balloon payments
If you buy an R200 000 vehicle and you are given a tenure of 72-month finance term at an interest rate of 10%, then your total vehicle finance amount will be R266 722.24 which amounts to R3705.17 per month.
If you sign a balloon agreement on the same vehicle at an interest rate of 10%, with a tenure of 72 months but with a 30% balloon payment, then you will pay R3093.62 over the 72 months, but you will still owe R60 000 at the end of the 72 month period.
Although Balloon payments are quite popular, one must be careful. Even if the car salesmen and the car finance representatives attempt to upsell you to a higher deal, with a more expensive car, please remember that many people have ended up in debt as a result of trying to take advantage of balloon agreements, and purchase vehicles that they cannot afford.
Therefore please ensure that you have enough money kept aside to pay the shortfall after the expiry of the tenure.
In South Africa, it is possible to get a good vehicle finance interest rate in South Africa contract from your bank or insurance company, as long as you have a good credit rating, and earn above the minimum wage. However, these car finance contracts usually have tenures that range between 12 and 72 months. The most important aspect of a car financing contract is the interest rate: please calculate extensively to ensure that the interest rate is something you can afford. It is important to know whether you are paying a fixed rate or a linked rate. If you decide to go for a balloon agreement please ensure that you purchase a vehicle that you can afford.