Car finance can sound like a lot of Greek to many people, and yes, there are plenty of things to consider. Let this be a starting point, at least, to explain some of what goes on, but also lead you to our many car financing articles that should answer nearly every question you may have. In this article, we'll focus on exactly what the prime lending rate is and offer some financing tips to consider.
Related: Car Finance Information
What is the Prime Interest/Lending rate?
The prime interest rate, or lending rate, in this instance, is the basic rate of interest that your average big bank will charge an individual when lending you cash for a big purchase. Because a car is a big-ticket purchase and you can't expect the average person to whip out the cash, this is set up so you can pay it off.
This rate is linked to the repo rate, though, the rate from which banks borrow money from the Reserve Bank. So when you hear on the news that there's going to be a repo rate change, that will affect the interest rate by the same margin. For more information on how this all affects your vehicle finance, check out this article.
The interest rate, however, isn't the same for everyone. In this case, when you apply for vehicle finance, the banks will look at several risk factors of lending you money. Depending on what risk you pose, they can offer you an interest rate above, equal to, or below the current prime interest rate . At the time of writing. The prime interest rate is 10.50%
Another thing to touch on is fixed vs variable interest rates. This is pretty significant because it will ultimately affect how much total interest you'll pay as well as y ur monthly instalments. Variable interest rates are linked Repo Rates and your interest rate moves up and down when the South African Reserve Ba k changes the Repo Rate. Whereas a fixed interest rate means your rate is locked in on the day you sign your contract, regardless of how the Repo Rate fluctuates.
Some financial tips for pre-owned buyers
- Improve your credit score - A lower credit score means banks will consider you a riskier borrower, which can mean either denied finance or less than favourable interest rates. You can improve your credit score by ensuring all your debit orders and outstanding bills in your name are up to date.
- Don't just look at the monthly instalment - Consider the total cost of everything to get a better scope of what you can manage.
- Do some shopping around - Check different finance houses and banks for what rates are available to you, at least from three lenders and consider getting pre-approval from your bank.
- Shorten the finance term - Commonly, an agreement is based on 72 months, but opting for a shorter term like 60 or 48 months can reduce interest, though it means your monthly instalments will be higher.
- Beware of balloon payments - While Balloon payments make the more expensive option seem more affordable, there's a risk involved where you'll pay interest on the total amount (Including the interest and balloon portion), so at the end of the finance term, you'll see a big sum to pay landing on your doorstep.
- Don't fall for it - If a deal seems too good to be true, it probably is. Very low interest rates and pressure to accept an offer will land you in hot water and could damage your credit score.
- Factor in some extra fees - If the vehicle isn't on an existing service plan and warranty, it would be a wise idea to take out additional plans to cover you for the finance period. If not, be prepared to budget for any additional maintenance and the like. Some banks won't allow you to finance the vehicle if you haven't taken out any of those plans.
- Can I actually finance it? - The cutoff vehicle age for finance with your usual banks is 10 years old, but some allow slightly older than that, but it will be condition-dependent. It also depends on the bank's policies.
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