Whether you are looking at new or second hand cars for sale, getting your vehicle finance in place will most definitely follow once you get serious about buying a car. Today the Auto Mart team takes a closer look at what Vehicle Financing is, the types of finance options and the two main types of Agreements available to South African buyers.
What is Vehicle Finance?
Simply described as a way to ‘fund’ your vehicle purchase, there are two types of financing options when it comes to purchasing a vehicle – Dealership Finance and Private Vehicle Finance.
Dealership Finance is the type of financing you apply for when choosing to purchase a vehicle from a dealership. Private Vehicle Finance is the type of financing you choose when finding new or used cars privately.
More info on Dealership Finance
This type of financing option is applicable when buying both a new or used car. Allowing you to finance a car for at least R 30 000 (after a deposit amount had been subtracted), this type of financing allows you to purchase your vehicle from a dealership. Note that this vehicle can be up to 10 years old.
A look at Private Vehicle Finance
This type of financing allows you to buy or sell a vehicle privately. An option when looking at second hand cars for sale, this vehicle financing options allows you to finance a car that is up to 20 years old. When buying a car, this option allows you to finance a vehicle for at least R 30 000 (after a deposit amount).
Vehicle Finance Agreements
From here, there are also two main types of Finance Agreements to choose from – the Lease Sale Agreement and the Instalment Sale Agreement.
Lease Sale Agreement
The Lease Sale Agreement means that you are leasing the vehicle from the financer. At the end of your Lease Agreement, you will then have the option to purchase the vehicle. This type of agreement is available over a period of 12 months (one year) and 72 months (six years).
A Lease Agreement allows you to ‘rent’ the vehicle from the financer. This is done at either a fixed or prime-linked interest rate. At the end of your agreement, you will have three options:
- The Vehicle is returned.
- You can purchase the vehicle, officially making it yours.
- You can extend the agreement.
Like with an Instalment Sale Agreement, the vehicle you are leasing, has to be fully insured. Monthly payments on your agreement can also be reduced by opting for the Residual Value option, entailing that the Residual Value is paid at the end of your agreement.
Residual Value, very simply explained, is the amount you can buy the vehicle for when you reach the end of your agreement. If you choose a lease type vehicle finance, you technically only pay for what you use. This means that you do not pay for the total value of the vehicle, the Residual Value being the amount left after you have paid for what you have used. The Car’s Total Value minus what you have used (what you have paid) equals the Residual Value.
Instalment Sale Agreement
The Instalment Sale Agreement can be between you and either a dealership or private seller. This type of agreement, which is applicable for both new and second hand cars for sale, entails that, while you drive the vehicle purchased, the bank technically owns it until you have finished paying it off.
This type of agreement involves you paying a pre-agreed monthly instalment over a specified number of months. After you have made your very last payment, the vehicle will officially belong to you. Keep in mind that, with an Instalment Sale Agreement, an interest rate will be applicable. This interest rate can be either of a variable nature or at a fixed amount.
When opting for this type of Agreement, financing periods can range from 12 months (one year) to 72 months (six years). Also keep in mind that during this agreement, you vehicle must be fully insured. This insurance can either be taken out from your bank (where your financing is) or at a Short Term Insurance Company (like Santam and Mutual & Federal).
Within this type of agreement, you can lower your monthly instalments by putting down a higher deposit. Another way to lower your monthly repayments is by adding a Balloon Payment car option to your agreement. Effectively postponing a part of your payment, this is a lump amount that has to be paid at the end of your agreement before the vehicle is officially yours (you take full ownership).
When it comes to your instalments
Like with most payments you make on a monthly basis, you can pay your monthly instalments as stipulated by the agreement either via a debit order or ‘manually’.
Whether you are making use of Dealership Finance or Private Vehicle Finance, you are entering into a legal agreement, which means that you will have to fulfil certain obligations. These obligations includes keeping the vehicle insured during the span of the agreement, your instalments are paid to the amount of and on the date as specified in the agreement you signed.
Should you fail to comply with the obligations and rules set out by your agreement, the financer can take action. Should you default on the payments as set out in your agreement, the financer is fully allowed to take back the vehicle (reposes), take action in regards to the payments owed and even cancel the agreement.
Top tips when it comes to vehicle finance and buying a car
Whether you are interested in finding new or used cars for sale, there are important aspects to keep in mind when it comes to financing your vehicle.
Before actually deciding on purchasing a vehicle, make sure you can pay the instalments, the insurance costs and still have money left every month. Why? Very simply put, there are so many things that can happen. The interest rates on your agreement could increase, your insurance costs could increase and, in some cases, other family emergencies might also come into play. You should have the freedom and ability to meet all your financial obligations without having to use every single cent of your monthly income.
Other considerations that should also be taken into account is your motoring costs – this includes everything from fuel costs and maintenance costs (like car services) to money spent on security for your vehicle (like your NetStar or Tracker system). Note: Security features in your vehicle will be a bonus on your short term insurance policy.
Should you run into financial problems, let your financer know. By doing this, you might be able to rework your agreement and extend your agreement to 72 months, or make an agreement entailing a Balloon Payment car finance option. Do note that this depends on the institution that financed your vehicle.
When buying a car, see if you can get a warranty. Authorised and reputable dealers should always be able to give you a warranty on their new and second hand cars for sale. Dealers of this nature will also be able to supply you with a number of important documentation including a roadworthiness certificate as well as a vehicle condition report.
When it comes to car loans for first time buyers, you might be required to have some back-up in the form of a Signed Surety. This entails someone (in many cases a blood relative like a parent works great) to stand surety for you, enabling you to actually qualify for credit.
While the institution still has to ensure that you can afford the payments set out by your vehicle financing agreement, the person who signed your Surety can be held responsible when you do not pay your instalments.
Also keep in mind that, the bigger deposit you put down on your vehicle, the lower your total loan amount will be, thus positively affecting your monthly payments. When it comes to purchasing a vehicle, opting for a second hand vehicle might also be a plausible option for you. Because these vehicles have already depreciated in value, the costs of purchasing used vehicles are lower (as compared to a new vehicle).
When you do opt for a second hand vehicle, warranties, road worthiness certificates and other documentation of this nature is important. Again, reputable or authorised dealers should be able to provide you with these documents and warranties.
Online Vehicle Finance Calculators
There are a number of great online car finance calculators that can help you when making a decision on what vehicle you can afford.
Please do keep in mind that these calculators are not meant to replace any knowledgeable advisor or bank representative. It is only useful if you would like a rough estimate of what you can afford, what your monthly instalments might be and how Balloon Payment car financing options, deposit amounts and interest rates might affect your monthly instalments.
Some of the useful tools available online includes:
- Bidvest Bank Monthly Repayments Calculator
- The MFC Instalment Calculator
- Standard Bank Repayment Calculator
- ABSA Car Finance Calculator
Thinking of buying a car? Whether your vehicle finance is already in place or you are just browsing, Auto Mart is one of the best places to find second hand cars for sale. With a large selection of vehicles for sale from dealers and private sellers from across South Africa, you are sure to find a vehicle that beautifully fits your pocket.