Vehicle finance explained

October 2015

Unless you’re an accountant, vehicle finance is complicated. Do you know how finance terms work? Is it a good idea to take a residual? What about the interest rate – should you take fixed or linked? We spoke to WesBank for this beginner’s guide to financing the car of your dreams!

Work out how much you want to spend
Before you can submit a finance application you need to work out exactly how much you want to spend every month on your car repayments. Remember to factor other expenses like fuel and insurance into your budget. And, if the vehicle you buy does not have a service or maintenance plan, you’ll need to put money aside every month to cover the cost of maintaining your new car. 

Prepare your documentation
Before you visit the dealership, prepare the necessary documentation to avoid unnecessary delays. To apply for vehicle finance, you will need to provide the following: 

  • ID document
  • Valid driver’s license
  • Last three payslips or last three months’ bank statements
  • Proof of residence not older than three months 

Why all the paperwork, you might ask? First, you need to provide the bank with proof of identity and second you need to prove that you can actually afford the vehicle in question. The documentation is required by FAIS (Financial Advisory and Intermediary Services) Act. 

Visit the F&I and submit a finance application 
The Finance & Insurance representative (F&I), who you will find at the dealership, is accredited by FAIS and legally bound to give you sound and unbiased advice. While most vehicle manufacturers operate in alliance with a specific finance house, they are able to, and should send your application, to all vehicle finance providers in the country – including the likes of MFC, Standard Bank and WesBank. Some manufacturers even have their own in-house finance providers, but you are not obliged to make use of their services. 

The finance provider/s will respond to the F&I on your submission and advise on whether or not your application has been approved, at what interest rate they are willing to finance you, as well as the payment period for which you have been approved. Nothing is cast in stone, and the F&I may have some room to negotiate a better rate for you, if need be. Remember to request that they do this.

Application unsuccessful 
If you are not approved due to affordability, you can either add a deposit or increase your existing deposit; alternatively you will have to negotiate a better deal on the car. You might even have to consider a different vehicle altogether. The F&I will be able to help you restructure your deal. 

Fixed or linked interest rates
A fixed interest rate will not change for the duration of your payment period. This can work in your favour, especially if the interest rate is volatile and you want the security of a fixed monthly repayment. 

A linked interest rate is linked to the prime lending rate. If the prime rate increases, so will your payments. However, if it decreases, you’ll pocket some extra cash at the end of every month. Linked interest rates are usually slightly lower than fixed. 

The F&I will be able to advise you on which interest rate is best for you.  

Residual or no residual?
A residual is often referred to as a ‘balloon payment’. This means that a percentage of the value of the vehicle is excluded from the finance amount and is payable as a lump sum final instalment at the end of the finance period. It is possible for the ‘balloon payment’ to be refinanced, so you can pay it off. It is important to note that if you do not pay back the lump sum, your car can be repossessed, so be sure to take this payment into consideration when budgeting for your new car. 

WesBank recommends a simple recipe when it comes to residuals: D before B except if it’s C, which translates to rather putting down a deposit before looking at a balloon payment unless it is critical

Investigate top-up cover
Top-up cover is designed to cover any shortfall between what you owe on your vehicle and what is paid out by your insurer if your car is written off or stolen. Speak to the F&I about adding top-up cover to your vehicle insurance. 

How long should you finance for?
When deciding on your payment period, remember that the sooner your vehicle is paid up, the less interest you will pay. Conversely, a longer finance period will lower your monthly instalments but accrue more interest. It will also mean that it takes longer for your vehicle’s settlement value to break even with its trade-in value. This means that the amount you owe to the bank is the same or similar to what the vehicle would be worth if you decided to sell it. In essence, the shorter, the better. 

Be honest at all times
There is no point in withholding information when you finance your vehicle, so make sure you disclose all the necessary information to the F&I. The questions they ask will help them to structure a deal that you can comfortably afford. 

Remember that you can back out of a finance application at any time. Don’t commit to a deal that you don’t understand or you cannot afford. Ask the F&I if you have any questions and don’t be pressured into signing a deal that you are not comfortable with. Remember, once you have signed the contract none of the details or terms can be changed.

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