Understanding vehicle finance can be slightly confusing for first-time buyers, but you need not worry. KIA Motors South Africa’s very own Finance and Insurance Manager Chaya Finger helps clarify some key financial terms that will help you better understand the key components of vehicle finance.
Why understanding your vehicle finance is critical.
As a first-time car buyer choosing to purchase a used vehicle can be a great option for many great reasons, especially if value for money is important to you. However, there are some pitfalls to buying a used car that you should always consider, like the vehicle’s service history and whether it’s been in an accident. Luckily KIA Konfidence’s stringent vehicle screening process takes care of many of these issues so the used car you choose won’t let you down.
Vehicle quality aside, vehicle finance is another key area of the car purchase process that used car buyers cannot ignore. How you choose to finance your vehicle can be the difference between a great ownership experience or an experience filled with headaches. This is why it’s extremely important to understand the following key vehicle finance terms:
It is an upfront payment that will reduce the total amount of money borrowed from the bank. In general, the larger the deposit you are able to pay upfront, the lower the total repayment cost and monthly installments will be. No two used cars are the same and deposits can help secure the pre-owned vehicle you intend on purchasing, because there may be other eager buyers looking to buy the same car.
According to the Banking Association Of South Africa, an interest rate is the “price for loanable funds borrowed for a period of time. Simply put, an interest rate is the price you pay for loaning money from a bank and is expressed as a percentage of the total loan amount. There are two types of interest rates you as a car buyer can choose.
- Fixed Rate: An interest rate that will remain the same over the entire term the loan is paid back. Fixed interest rates are often higher than linked rates, the benefit is that you will have a predictable instalment over the term of your loan.
- Linked Rate: As the name suggests, a linked interest rate is linked to the prime-lending rate set by the South African Reserve Bank. Whenever the prime lending rate increases, your monthly instalment will increase, if the prime lending rate decreases, your instalment will too. It is important to keep some room for these changes in your budget.
A balloon payment is a lump sum payment that must be made at the end of your finance term. Balloon payments generally exist as a way to reduce monthly instalments and are expressed as a percentage of the total price. Taking a balloon payment option means you either have to save up to make the lump sum payment at the end of the term, or sell the car and settle the balloon amount. Alternatively you could take a new loan to pay off the balloon payment.
Your payment term is the time period you choose to pay off the loan.Currently, monthly increments can be anything from 12 to 72 months. Shortening the term would increase your monthly instalment and decrease your overall loan repayment amount, whereas increasing the payment term length would decrease your monthly repayment but increase your total loan repayment.
It’s always a good idea to use a vehicle instalment calculator to get a rough idea of how much a vehicle can cost you on a monthly basis, but always note that this serves as a guide and won’t include fees and any extras you’ve included in your purchase. Lastly, always leave room in your budget for insurance costs and interest rate changes.
We hope these terms will help make your buying experience easier to navigate.
Happy car hunting!
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