Finding a car repayment scheme that works for you

When it comes to buying cars, South Africans seem to throw common sense out of the window. Most of us look at the salesman, ask what the car will cost over the maximum repayment period and then can’t wait to sign our lives away.

Forget things like interest rates, the different ways of financing a car or even getting that repayment period reduced. When we want a car, we want it now. The attitude is that if the salesman said it was a great deal, it must be.

Pull in those reins, stop galloping and consider these basics.

Some basic car repayment calculations

Let’s play with some numbers using an interest rate of 11% — a rounded-off average rate for instalment payments over the last 10 years as calculated by the Reserve Bank. Let’s also assume a car price of R275,000 with repayments set for 60 months and play with paying a deposit that is below the 10% level. In this case, R27,500 which is quite a chunk of change.

The options (in rands) look like this:

Loan amount	Deposit	Monthly payment	Total paid over contract	Total interest over contract	Savings
275 000	nil	5 980	358 734	83 734	nil
275 000	10 000	5 762	345 699	80 699	Payment pm: 218 Over 60 months 13 080

To summarise: If you pay just a once-off R10,000 as a deposit, that money is going to save you R218 a month in instalments and R13,080 throughout the loan. Add a total interest saving of R3,035 over 60 months, and that means R16,115 in your pocket.

Ready for more?

Let’s take two more options. In these scenarios, you get the salesperson to calculate the payments and then ask for R250 a month to be added — something that is so rare that the salesperson will probably collapse.

 You ask for one case using the R10,000 deposit, the other without a deposit. When the scribbling is done, you will find that:

Loan amount	Deposit	Monthly payment (+250)	Total paid over contract	Total interest over contract		Payment period
275 000	Nil	6 230	354 055	79 055		57
275 000	10 000	6 012	341 037	76 032		57

To summarise: What is most important here is that the repayment period shrinks to 57 months and interest costs reduce further.

Think about these things when it comes to car repayments

Enough of the sums. When looking at instalment payments, think about these things:

Do some research. Reach out to various finance providers and see what they can offer. If you would rather not do the work, get the dealer to get comparisons. While doing this, ask what the interest rate will be.

A lot of dealers will have a preferred supplier and will think about their commissions first rather than the deal you are getting, so their idea of an excellent deal might not coincide with yours.

Check the fees that the institution is charging. There could be initiation fees and monthly “admin costs” attached. Compare different suppliers, or see if your chosen finance house is negotiable.

• Read the proposed contract and look for early payment policies and check that they are in line with the Consumer Protection Act.
• Check out if there is a dealer scheme offered. It’s common these days for joint ventures to exist between a brand and a financial institution. These rates can be excellent but could be tied to specific models.
• If you are offered a choice between “a fixed interest rate or floating rate”, think carefully. A fixed rate gives you certainty but is more expensive. It can work for you if rates rise fast. A floating rate could see rates increasing or decreasing, and your payments would follow. In times like these, when rates are dropping, a floating rate scores.
• Keeping the instalment period as short as possible. If you are in some doubt about whether you can pay the car off in under 72 months, take the most extended term and then try and reduce this by paying in extra money when you can. This will work for you if you don’t spend the extra cash elsewhere. What you should be doing is looking at a cheaper car.

Because the rate of borrowing is always higher than the interest on investments, it’s better to pay your car off as quickly as possible and reduce your debt levels.

• Split your payments. If you pay half of your instalment every two weeks, instead of a single amount on the due date, you will reduce your interest payment and could save up to a month’s premium every year.
• Buy your insurance rather than accept the dealer’s offer. It is not compulsory to take insurance with the institution providing the finance. It’s easier, yes, but often the more expensive option.

Most of all, do these things

• Stop your heart from looking at the car and telling your brain that taking a huge balloon payment on board is okay.
• Avoid the offers that say “Drive now and only pay your first instalment in six months”. Bank’s aren’t in the business of giving money away, so you may not be asked to pay the principal, but six month’s of interest will be added to your overall bill when you do start paying.

In the final analysis, keeping your wits about you is the most important thing you can do when buying a new car. Forget that beautiful new car smell, the look of those leather seats, the gleaming paintwork and that purring engine.

Walk away for a while and think about the long-term financial commitment and if you want to trade in that annual holiday so you can drive the car of your dreams.

Also read: Wesbank introduces temporary outstanding debt insurance policy