Owning a car is one of life’s milestones, bringing consumers independence and freedom. However, buying a car can be a daunting prospect for many newcomers. The combination of huge choice in the market, a large financial commitment and complex financial terms can intimidate first-time buyers, turning an exciting occasion into a stressful nightmare.
WesBank provides buyers with tools that bring peace of mind and offer total transparency.
“Our aim is to use technology to simplify the buying process to the point where customers feel informed and empowered, rather than intimidated,” said Rudolf Mahoney, Head of Brand and Communications at WesBank. “That said, the process still has to start with a fundamental understanding of all the steps involved with buying a car. Thankfully, we have that expertise, too.”
For those completely unfamiliar with vehicle finance and the car-buying process, WesBank has a comprehensive checklist to help them to understand each step of the process and its necessity, to ensure they are as informed as possible and can buy a car feeling confident.
Start with a budget
The most important part of buying a car is knowing what you can afford. If you have saved up money to buy a car cash, your budget will be determined by your savings. However, if you finance a car – as around 65% of South Africans do – then you will need a loan to buy a car.
Loans are paid off monthly, using instalment payments, which means that each month you need enough money to meet that payment. The more expensive your car purchase, the bigger the loan, and the higher the monthly instalment.
To calculate how much you can afford to pay each month, you need to draw up a budget. This will let you see all your expenses alongside your income. You’ll know exactly how much money is coming in monthly, how much is going out, and how much is left over after the bills are paid.
Factors of affordability
Affordability is not just about how much money you can afford to spend right now, it’s also about how much money you can manage to pay for a monthly repayment for a car.
For example, if your budget says you have R5 000 left after all expenses, it does not mean you can buy a car that costs R5 000 per month. That amount has to cover all the other costs of vehicle ownership, including fuel, maintenance, and insurance as well as any other ad hoc or unexpected expenses that crop up.
All of these costs should add up to less than your total budget – which also means leaving room for any increases in these expenses. Remember, insurance premiums can increase each year, tyres may need to be replaced and fuel costs are also on the rise. It is therefore best to look at your budget over five or six years; the most popular contract terms for car loans.
Always be insured
While it is one of the costs that you have to include in your budget, it bears repeating that insurance is an essential item for anybody with a car – even if it is not financed. If you use vehicle finance, it is a contractual requirement to have an active comprehensive insurance policy.
In the event of an accident a comprehensive insurance policy will pay for damages incurred, even if you are at fault. If the car is uneconomical to repair, also known as a “write-off”, or if it is stolen, the insurance company will settle the remainder of the loan balance with the bank. This means you don’t have to worry about paying for expensive accident repairs – or paying off a loan for a car that you can no longer drive.
Find the right deal
Once you have established what you are able to afford each month, including all additional costs, then you can use a purchase price calculator to determine the loan amount that your budget will support. It is not a guarantee that you will qualify for that amount – but a good indication of what price range you can shop in.
With an idea of how much you can afford, you can start looking for a car that suits your needs. Remember to ask yourself practical questions in this process:
Apply to qualify
If you’ve done all your homework and budgeting, you can then go ahead and apply for vehicle finance. This can either be done on the WesBank website where you can get an instant answer, or you can do it with the assistance of the car dealership.
The application process involves providing documents to prove your income (pay slips and bank statements) so that banks can calculate how much you are able to afford. If you’ve already drawn up your own budget and are applying for finance that you know you can afford, you will have a higher chance at qualifying for the finance.
Remember that you need a valid driver’s licence as well as proof of address, for FICA purposes, when applying for vehicle finance.
You can rely on the F&I
During the process of buying a car you may come across items you are unsure of; this is when it’s reassuring to know that there are people you can ask to explain unfamiliar terms, products on offer or conditions. Every car dealership has a Finance and Insurance (F&I) executive whose everyday job is purely to inform and assist buyers.
The F&I’s role is regulated by the Financial Advisory and Intermediary Services (FAIS) Act as well as the National Credit Act (NCA). This means that they are legally obliged to give you financially sound advice and explain what you can and cannot afford.
Structure your contract
With the implementation of the NCA, banks now make it possible for you to structure your finance contract in a way that suits your affordability. This means that you can choose the contract term, the type of interest rate you want, whether you want to pay a deposit and if you would like to use a balloon payment.
Contract terms are the period of time over which you repay the loan. They can be between 12 and 72 months – shorter terms will have higher monthly instalments, while longer terms will yield a lower monthly payment.
Two types of interest rate are available to consumers: fixed and linked. A fixed interest rate will be slightly higher than a linked rate, but a fixed interest rate will remain the same for the duration of the loan. A linked interest rate will change whenever the South African Reserve Bank changes interest rates. If the Reserve Bank increases the interest rate, it will affect you loan and your monthly instalments will also increase. If the Reserve Bank lowers rates, your monthly instalments will be slightly lower.
A deposit is a substantial initial payment you can make toward the purchase amount at the time of purchasing the car. Paying a deposit will lower the monthly instalment, or it can help you settle the loan sooner. By paying a deposit, you borrow less money from the bank, which also means paying less in total interest.
A balloon payment is a large payment that needs to be made at the end of the finance term. Generally, balloon payments can be between 5% and 60% of the total purchase price, and it can be useful for helping to lower your monthly instalment. If you do opt for a balloon payment you should remember to save up to make that large payment. Alternatively, you can sell the car and use it to settle the balloon payment, or you can use a new loan to pay off the balloon payment.
Use the flexibility in structuring your contract to make sure the monthly instalment is affordable and that you pay off your loan as soon as possible.
When structuring your contract you are allowed to add additional items to the car purchase price. This can include small extras, such as tinted windows, as well as value-added finance products. These include services such as paint and dent protection packages, to help maintain your car’s appearance, and extended warranties to ensure peace-of-mind motoring. Also available are financial assistance products that can help protect your budget in the event of death or theft.
The type of value-added products and services available depend on the dealership and bank, and you can always ask the F&I for more information to find products that suit your needs.
Count other costs
When you draw up your budget for buying a car you might not be aware of any additional costs – sometimes considered hidden costs. These include any licensing, registration and administration fees that the dealership may charge for the preparation and delivery of the car. They are sometimes called “on the road” fees.
However, these costs have to be clearly explained by the dealership and the F&I. You are allowed to query all costs indicated on the final invoice. It is also possible to pay these fees in cash, rather than including them in the finance package. Doing so will lower your monthly instalment.
These are some of the common terms you may come across during your car-buying journey. Use this reference to keep yourself informed.
National Credit Act – a law that came into effect in 2007, regulating the way that banks can lend money to consumers. This law protects consumers from bad lending practices.
Financial Intelligence Centre Act – a law that protects against fraud, by requiring banks to fully establish the identity of lenders. This act is the reason that consumers have to provide proof of identity, proof of residence and other documentation, at the time of applying for credit.
A large payment made up front. It lowers the amount of money borrowed from the bank. For example, if you want to buy a car worth R100 000, you can pay a R20 000 deposit. This means you only need to borrow R80 000 from the bank. Paying a deposit can lower your monthly instalment or reduce the total contract term.
A large payment made at the end of a contract term. For example, if you want to finance a car of R100 000 with a 10% balloon payment, then you will pay off R90 000 over the agreed period and make a R10 000 payment at the end of the contract term.
Banks charge interest on loans. The interest rate for your loan is determined by your credit profile and the current repo rate set by the South African Reserve Bank.
This is the timeframe over which you choose to pay off a loan. You can pay off a loan over 12 months, with higher monthly payments, or over 72 months if you choose to have lower instalments. The longer the loan, the more you repay in total interest.
Popular terms for car loans are: 12 months, 24 months, 36 months, 48 months, 54 months, 60 months, 72 months.
This is a current snapshot of your current debts and historic use of credit. Banks use this to determine if you are a reliable borrower. Your credit profile shows banks everything about your current accounts, missed payments and total amount of money you owe.
This is something only banks use, and it is not something you see. You will have a good credit score if you are a low risk to the bank: you always pay your accounts on time, you don’t have a lot of debt, your finances are stable and have existing assets. You will have a less-favourable credit score if you don’t have a secure job, if you have missed payments, if you owe a lot of money and if you show a reliance on credit.
This is similar to a budget you draw up at home, but it is done at the dealership with the help of the F&I. This helps you determine how much you are able to afford, taking into account current income, expenses and all costs associated with motoring. It forms part of the finance application submitted to the bank.