For most of us, a new car is the first large financial commitment we are likely to make. Unless you are very diligent in your savings regime, or won the lotto, the only avenue available to us is through a car finance loan, either through a bank or other financial institution.

As with any large purchase, you must first determine how much you can afford to pay in monthly instalments. Knowing your credit score will help you during the negotiating and purchase phase. Also, request the full vehicle details from the dealership and check the book value (through TransUnion at a charge or R10) to make sure you are paying a fair price. When buying through a dealership, you can opt to let the dealerships finance and insurance (F&I) representative handle the application process for you. Generally, they will submit your application to more than one bank or institution they have a relationship with to find you the most affordable deal.

Once you have been approved, the finance provider will communicate the interest rate and payment period they are willing to offer to you. This is where the legal jargon starts. The finance agreement sets out all the details of your loan; how much you will pay per month and for how many months (the length of a repayment can range anywhere from 12 to 72 months.)

A longer finance period means a smaller monthly instalment; however, it also increases the amount of interest you will have to pay. Interest rates can be fixed or linked. A fixed rate means you will be charged the same rate until the loan is repaid. This means you can budget on a fixed amount. If you choose a linked rate, you choose to link your interest rate to the prime lending rate of South Africa, meaning that your instalment will increase or decrease as the prime rate increases or decreases. Be careful when considering this option, as it is much riskier especially if you choose a longer repayment term.

Another careful consideration is the choice to accept a balloon payment. Basically, a balloon payment is when they calculate your finance on an amount lower than the actual cost, with the residual or balloon payment due as a lump sum at the end of your loan period. This will decrease your monthly instalments and interest which may make the vehicle more affordable during the finance period, but with the catch that you have the balloon payment waiting for you when the loan is finished.

Before you let any person assist you with any finance plan or loan application, make sure that they are FAIS-accredited. You’ll also need to bring your ID, valid driver’s licence, last 3 payslips or 3 months’ bank statements, and a proof of residence not older than 3 months with you to the dealership, bank or financial institution in order to process your application.

The final step is insurance. All financial institutions make it a condition of your loan that you must take out comprehensive car insurance. This is where you’ll need to do some homework beforehand to be prepared with the best quote and not be pushed into making a hasty decision.

Once all this is done and dusted, there is just one thing left to say: Happy driving!

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