How are You Paying for Your Dream Car? What’s the Plan?

 Couple completing online vehicle refinance application


Cash isn't the only option when it comes to buying a car. But, as with any big purchase, it's important to weigh up your options first.


Like a mozzie lured to an exposed ankle or a sports star courting marital scandal, the South African motoring market remains stubbornly drawn towards car ownership. While consumers in other parts of the world have long enjoyed long-term leasing agreements or even ride-sharing arrangements, South Africans insist on owning their rides.


Nobody knows why this is so. Maybe it's because of our failing public transport system. Maybe it's the complimentary dried fruit gift basket you get from the dealership. Either way, buying a new car is expensive... so how can South Africans do it?


Are balloon payments the way to go?

One in five Vehicle Finance deals in South Africa include some form of residual payment plan, or "balloon option", as it's commonly known. Fun as these may sound, balloon deals tend to burst, creating a tricky mess to deal with.


Structured as the mirror image of a traditional up-front deposit, balloon payments add a calculated percentage of the original purchase price to the end of your payment plan – selling a cross-that-bridge-when-you-get-there scenario. The trouble is... much like an amnesiac politician who's questioned about missing funds, car owners can very easily get comfortable with the delayed pain of a balloon payment plan, while forgetting to save for the inevitable day when the balloon bursts.


What happens when you still owe money, but the finance period is over?

One popular option when it comes to coping with this kind of stress is a Vehicle Refinance plan. A benefit of refinancing is that an updated credit rating (thanks to you being 72 months older and wiser) may qualify you for a lower interest rate on a new, inevitably shorter-period loan than the one initially drawn up.


The downside is that in calling upon this lifeline, you invite any number of additional fees and potential penalties, while also running the risk of paying more for your car than it ends up being worth — losing money in the end on a future sale as a result.


Can you get a lease agreement in South Africa?

A different form of payment that's rather tempting (and currently gaining traction in our market) is a custom leasing agreement, as offered by various mainstream car brands. While Volkswagen views this type of scheme as a viable option for its future-focused range of all-electric vehicles (which lessens the worry that these tech-sensitive items will depreciate), premium brands like BMW and Audi are using the arrangement to guarantee future buy-back values.


Much like with your smartphone contract, the thinking is that once you've "locked in" with your chosen brand, you're likely to remain with that brand as long as it offers you timely upgrades of your device/wheels. However, the option exists to either buy the vehicle with cash or refinance your existing vehicle once the terms of the agreement have been met.


Unless you're able to place a sizable deposit on a new car purchase, or you fall within the tiny percentile of the population that can part with a couch-full of cash to assume immediate ownership, there are pros and cons with each Vehicle Finance decision.


In most cases it's best practice to carefully plan around what suits both you and your budget, avoiding (where possible) extended terms and conditions, compound interest and the overcapitalisation of your asset. Luckily, you can compare with Hippo to make sense of all that and find the best deal for you.


This article is for informational purposes only and should not be construed as financial, legal or medical advice.

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