If you put down a deposit, you can reduce your monthly repayments, as you’ve already effectively paid off a piece of the car, so to speak. You can also reduce the total amount of your car loan, when you borrow money from a bank or any financial institution. If you take a smaller loan, it also means you will be paying less interest accumulated on the loan. The only con of buying a car WITH a deposit, is that you will need a lump sum of money up front, and most of us have issues with cash flow. You can read here to see who's eligible for car finance.
Related: Where can you finance a car with bad credit?
How about a trade-in?
Trading in your old car against the value of the new car you’re interested in, is another option. This will save you precious time and the hassle of finding a decent, private buyer to take your old car off your hands. However, you may lose out on a few bucks as you might make less money by trading in at the dealership. You will also have to fix and pay for any damage to the car you intend to trade in, or you won’t get a decent deal. You will also need to do your homework, so you know the true value of your car, and some serious negotiation for the best price will surely have to be done at the dealership – and not everyone likes to haggle. How long should you keep a new car before trading? You can read here.
And what about balloon payments?
What are balloon payments first and foremost? It’s not ideal, but most people end up choosing this option as they just don’t have a deposit to put down. In the exact words of Wesbank.co.za, a balloon payment is “a final instalment which is much larger than your ordinary monthly payments, and which you pay right at the end of your agreement. It allows your ordinary monthly instalments to be more affordable.”
The balloon amount is worked out at the beginning of your contract and is seen as a 'future value'. Remember, the higher the balloon amount, the greater the interest that you`ll owe over the full agreement period.
“Longer finance periods and large balloon payments will bring down monthly payments, but there are definite disadvantages,” says Rudolf Mahoney, WesBank head of research.
“Buyers end up spending a lot more on the interest over the longer period of the loan, and a balloon payment, also subject to interest, could attract even more charges should a buyer decide to refinance”, says Mahoney.
My agreement has expired and it is time to pay the balloon payment or residual value…but I’m short on cash. What can I do?
“When an agreement expires, the final payment is due immediately. In order to cover the balloon or residual value, you have the option of applying for a new agreement* with a financial institution (such as WesBank) through which the residual or balloon amount is re-financed (provided the qualifying finance application is approved, and the amount excludes any arrear amount or arrear interest).” In the end, this is going to cost you even more.
Should you opt to trade in your vehicle, the balloon payment’s value is then subtracted from the trade-in value of the vehicle.
“It’s very important for you to understand that if you fail to settle or refinance the outstanding balance, we will have no alternative but to proceed with a repossession process and will be obliged to make a report to the credit bureau. You will also be held liable for any shortfall that may arise if the vehicle is sold on public auction”, says WesBank.
So just save, save, save, so you can put down that deposit!
*If you would like to discuss this type of re-financing with WesBank, contact them at least one month before your agreement expires.
