The Comprehensive Guide To Buying a Car: Part Four
Financing a car can be a confusing and complicated process. This guide will answer your questions around finance when buying a new car.
Published: Thursday, March 23rd 2017
If you are buying your first car, you might find the process complicated. There are several processes that you have to go through before signing those final papers. It might also come as a surprise to you how many people you will need to deal with during the procedure.
Let us start with the two finance options you have when you want a new car.
1. Installment Sale Agreement
In this instance, you will purchase the vehicle from the dealer or private seller through the bank. This will mean that the bank will own the vehicle for the specified term, until you have paid off the car. You will pay off the car in monthly installments, which you can have created as a debit order. An interest rate will be agreed upon that will be charged by the bank. See more about this below.
2. Lease Agreement
This allows you to lease the vehicle from a financier, with an option to buy at the end of the period. This option is tax deductible. So, if you are self-employed, this would be a good option for you.
Who Will you Be Dealing With?
The first person who you have been dealing with on the floor is the sales person. This is the person who would have shown you the car, taken you for a test drive, and would have been corresponding with you with regards to your decision on the car.The next person will be the dealer Finance and Insurance Representative (F&I). These are representatives of the banks, sitting in the dealerships, who make contact with the banks on your behalf. They advise you on your finance options and ensure that you have insurance prior to signing the final agreement for the car. Every F&I is registered with the NCA and is the vital link between you and the bank. They will have a checklist for you to tick off, so make sure you don’t rush this process.They will provide you with an application for you to fill out. It is an in-depth document that requires you to disclose all personal and financial information. You will need to provide a copy of your driver's licence, ID document, three months pay slips, three months banking statements, and a proof of residence. All of these will be carefully evaluated by the F&I and the bank.
Other Factors Involved In Financing a Car
Credit Checks And Credit Bureau
Once your application is in, the bank will need to check your credit score. They will firstly check whether you have some form of credit, in order to ascertain your paying behaviour. Your credit worthiness will be measured, together with your level of indebtedness. Should you have too many accounts, the bank can decline your application based on affordability. Should you have no accounts and credit, the bank can also deem you too risky to finance. If you have been blacklisted, or are under debt review, you will be rejected for the application. It is important to keep a solid, clear credit score as much as possible.The bank can access this type of information from various credit Bureaus in South Africa. Transunion and Experian are the two biggest bureaus. The bank can log onto your profile and view past and present accounts, work out your monthly expenses, and match it against your salary. Should your expenses be higher than your income, you will be declined. All financial institutions have access and can contribute to these credit bureaus.
Now, it’s time for you to decide on what deposit you will be putting down. In terms of the National Credit Act, it is not compulsory for you to put a deposit down. Doing so will, however, affect your affordability of the car. The larger the deposit, the less your monthly installment and the more likely the bank will be to approve the application.
If you are a first-time buyer, with very little credit history, you will be seen as a bigger risk to the bank. They could ask you to have a blood relative sign surety for the vehicle. This will mean that, should you not be able to honour your payments, they will become responsible. In essence, it is just added protection for the bank against non-payment.
The F&I will assist you in working out the term of the contract. This refers to the amount of time you will spend paying off the car. The higher the term, the lower the installment. But, this will also dictate a higher interest rate. Terms range from 12 to 72 months.
You can decide between requesting a fixed or linked interest rate. A Fixed Interest Rate will stay the same throughout the duration of the contact. This is recommended in an unstable economy, as your monthly installments will remain despite the fluctuation within the economy.A Linked Interest Rate is linked to the prime lending rate. Therefore, if this decreases over your repayment period, your repayments will decrease. Should there be some instability, however, you could end up paying a lot more during a financially unstable time.
Balloon Payments are one of the most debated and controversial parts of buying a car. A balloon is essentially a percentage of the loan that gets shifted to the end of the term. If you agree on an R30 000 balloon, it will be removed from the calculations on the monthly installments. This will either need to be paid up at the end of the term, refinanced, or you will need to sell your car directly.While a balloon does significantly lower your installment, it is the riskier option and might not be the best solution for you. Ensure you do thorough research on balloons and, keep in mind, you will not know what your financial situation might be in the next five years.
Various extras will naturally be added onto the contract. So, make sure you go through it carefully and select which extra you do and do not want. The admin fees will be added, which will include all fees from the dealership and bank. Licensing and delivery will also be added, which is totally normal. What can also be added are various protection packages; dent, paint, window, window tinting, engine protection, etc. Make sure the F&I goes through each one, and decide whether you would like them included.Extras can also include the Warranty and Service Plans. A Warranty is highly recommended when purchasing a car. This will basically guarantee that any large repair to the car will be covered. A Service Plan will cover all services over a certain period.Extras can also include products to protect your finance. You can protect your deposit, or add a gap cover insurance, which will settle the loan should your insurer not pay out completely.