How to finance a new car

Hilary Hackney

My Dad brought me up to be independent and a go-getter! After Varsity, when a lot of my friends were getting married, I was focusing on building my career and securing my independence. Although I will never change the path that I took… I must admit when I found myself at 30 something and still single, I did have a bit of a panic moment. That lasted for about a minute! ??


I may have been a late bloomer when it comes to relationships, but all is not lost. I’M GETTING MARRIED in a few months’ time. The advantage of getting married a little later in life is that both my husband-to-be and I are a lot more financially secure than we were in our twenties. With that little advantage….my go-getter self, decided that I should by myself a wedding gift! A nice shiny one… with four wheels! 


I have never owned a brand-new car before so this purchase was extra exciting for me. Once I had made the decision to purchase the car – I wanted to get finance approval as quickly as I could. In amongst the excitement however I was very careful to ensure that I got the best finance deal possible. I really did not want to get tricked into a deal that would end up costing me unnecessary amounts in interest charges. 


I’m going to share my experience and tips with you:


Speaking to the finance and insurance (F&I) manager at the dealership which allows you to interact with a specialist and clarify any questions you may have. They can also assess your specific situation and offer you advice on structuring your finance agreement, as well as a range of insurance products relevant to your deal. The F&I at the Imperial Auto dealership where I purchased my car co-ordinated everything on my behalf. 


The main factors that you should consider when financing your car are: 


The structure of the deal             

  • Deposit – paying a deposit reduces your monthly repayment. If this is possible – it would be a smart move to make from the get-go! 
  • Fixed versus linked interest rate – during periods when interest rates fluctuate, you may want to consider discussing a fixed rate with your bank. This option has pros and cons to consider.
  • The contract period – remember that a longer period reduces the monthly instalments but attracts more interest payable over the period. This is entirely based on what you can afford on a monthly basis.
  • Balloon payment – opting for a balloon payment means that you will need to settle a lump sum in order to own the vehicle at the end of the contract period.  Although a balloon payment will reduce your monthly repayments, it increases the financial burden at the end of the contract period. You need to be consciously aware of the future implications of this type of deal structure.


Additional insurance products

There are a range of insurance products available which cover both the car (warranties, service and maintenance plans) as well as yourself (death, disability and retrenchment cover) which you can consider.  Whichever you choose, would depend on your personal situation as well as the car you intend buying.


The F&I will submit a single application to all the banks and obtain quotes from the various banks on your behalf, thereby making the process transparent for you to choose the best interest rate.


There’s no guarantee that you will be approved for vehicle finance, but there are things you can ensure you do which will help improve credit health and greatly increase the chances of being granted credit.  


1. Work out your affordability  

Find out how much you can afford to spend on a car. To do this, simply take your income (after taxes and deductions) and subtract all living expenses - food, rent, clothing accounts, etc. These costs must be deducted from your total income to find out your disposable income. This is the amount that can be used for luxuries - or essential credit, such as monthly car instalments. 


2. Don’t forget the running costs    

Affording a car isn’t just about the monthly instalment. If you have R5 000 left after paying all monthly expenses, you will have to use that amount to cover the instalment as well as other essentials. Fuel and insurance are additional monthly expenses that need to be budgeted for. If your vehicle doesn’t have a service plan or maintenance plan you should also be saving money each month to cover regular maintenance costs. If you show that you have factored this in your chances of getting credit will be better.


3. Save up for a deposit  

Financial responsibility reflects well on your credit profile and will assist in ensuring your finance application will be approved. If you’ve shown the bank that you can budget responsibly, you’ll really impress them with a deposit. While it’s not absolutely necessary to pay a deposit, doing so can be in your favour. Paying a deposit reduces the amount of credit required for the transaction which, means lower monthly repayments and improved affordability. Your ability to afford the monthly repayments is one of the biggest drivers when banks assess your finance application. 


4. Get rid of unnecessary debt       

The National Credit Act requires the bank to take all credit facilities into account, so if you have credit facilities such as a credit card with a limit of R50 000 and an overdraft with a limit of R25 000, these are also included in the assessment - whether they are fully used or have a zero balance. These facilities remain in place even after your vehicle finance has been approved, and if you do use them then your monthly affordability has to include their repayments. When applying for credit, the bank has to take all of your current and available credit into account. These figures are used in assessing your affordability.


I am so happy that I had such great assistance from the guys at Imperial Auto who helped me structure a great deal.  Car finance is sorted……now I can focus on my wedding plans!