How does vehicle finance work?

How does vehicle finance work?

February 27, 2020
Posted by: Estefan

Buying a new or second hand car for cash or through vehicle finance is one of life’s most sought after rites of passage. But, have you figured out how you will go about buying that longed-far vehicle?

Most prospective car buyers rely on vehicle finance solutions as most consumers do not possess a reserve or ‘savings’ account worth plus/minus R500,000. If you’re one of these consumers, then you’ll know that buying a car for cash is just not in the realm of possibility – even if it is in that realm, why deplete your life savings to buy a car?

So, you have 2 options to consider if you really want that new or second hand car:

  1. Lease the car
  2. Buy it through car finance.

If this sounds like you or if you’re just interested in some personal discovery as to how car or vehicle finance works, then take a look at cheat sheet on how vehicle finance works and how to calculate your vehicle finance repayment:

Car finance can help consumers get the most appropriate option tailored according to individual circumstances. It is, essentially, a credit agreement between you and the financier of the car – who is generally an individual, a public group, a private group or a financial institution, who borrows money with the expectation of having the car loan amount repaid along with interest and additional fees.

But, did you know? Every vehicle finance repayment option is different.

  1. Personal car loan – Borrow money – a lump sum over a fixed term – and buy a car with cash in hands.
  2. Personal contract purchase – You’ll have to pay an initial deposit and fixed car loan installments to ensure your vehicle finance repayment, which generally tend to be lower. The new or used car will belong to the financier until the end of the contract period, after which you can then either make a balloon payment, exchange the used car or return the used car to the supplier.
  3. Hire purchase – Pay an agreed minimum percentage of the car’s value as an initial deposit and fixed monthly car finance repayments thereafter. In a nutshell, you’ll be hiring the new or second hand car until the final has been coughed up. Alternatively, you can also request a settlement figure if you’d prefer paying off the car finance balance. You’ll then be the proud owner of a vehicle!
  4. Guarantor loan – If you’ve been battling with poor credit ratings, then this option has been specially designed for you. Here, a third party – friend or parent – agrees on the contract that you will ensure the monthly vehicle finance repayments of the car loan and if you fail, they will be forced to take responsibility.
  5. Leasing – Just like an initial deposit, you’ll have to make an initial rental payment. But, at the end of the day, you’ll be simply renting the car, rather than paying off a car loan. Hence, you won’t have the prospect of looking forward to being a car owner. In spite of that, you can add a maintenance cover package to feel comfortably covered with particular vehicle services. At the end of the contract term, you’ll have to return the car you’ve built a memorable relationship with.

But, let’s say that you found and qualify for the best car finance option suited to your circumstances, and can finally take a wheeze of relief. Well… not exactly! Just as any worker hopes that end-of-year bonus, a dealer works towards his or her commission. And that means hidden costs! In the final stages of the financing deal, you may get some added extended warranties, car techs such as alarm systems, undercoating, admin fees, etc., which dealers make most of their commission on.

If you’ve been haggled into these side deals, then your monthly vehicle finance repayments are not exactly what you thought it might look like. Recon your car budget and get an accurate calculation on your monthly car loan instalments with the CarZar Vehicle Finance Repayment Calculator.

Already own a car? Get a free online quote for your car – it only takes about 60-sec anyway.