TL;DR - Our version of "I'm not reading all that, *SparkNotes pls."
- Know Your Budget: Before you start dreaming about that shiny new car, figure out what you can afford—think of it as setting the stage for a healthy relationship with your wallet.
- Understand Interest Rates: The lower, the better. It’s like shopping around for the best deal on your favourite shoes—every bit of savings counts.
- Loan Terms Matter: A longer loan term means smaller monthly payments, but you’ll pay more interest over time. It's like choosing between a short sprint or a long marathon—know what you're in for.
- Credit Score Counts: Your credit score is like your financial report card. A higher score can get you better rates, so it's worth keeping it in check.
- Consider Additional Costs: Insurance, maintenance, and taxes—don't forget these extra expenses when planning your car budget. They’re like the hidden costs of that “great deal” online.
Because we all have to start somewhere.
After a house, a car is likely to be the biggest purchase you will make.
And with the way the South African economy is set up, most people are likely to go the route of financing to help pay for their vehicle.
As much as a car is a status symbol, it also comes with a sizeable set of new responsibilities.
So, we’ve compiled a guide on all things car finance and loans to help you understand what options are available for you and how you can afford your new four-wheeled baby.
Types of Car Financing:
There are numerous types of finance to choose from; the trick is determining which will suit your needs best.
The most common financing options include:
Car loan
How it works is that you borrow a specific amount from a lender, typically a bank, and then have to repay it over time with a percentage of interest.
The car is collateral, and once the loan is fully repaid, you fully own the vehicle.
Car lease
Leasing involves paying monthly payments towards using the car for a specified time, usually two to three years.
With a lease, you don’t own the car in any capacity but rent it from the leasing company. At the end of the lease term, you can return the vehicle or purchase it at a predetermined price.
Dealer financing
Car dealerships also have their own financing methods. It involves directly obtaining a loan from the dealership or through a partnership with a financial institution.
Financing with a dealer is quite convenient, but it’s essential to review the T&Cs and compare them with your other options to ensure you’re accepting the best deal.
Personal loan
Instead of getting a car-specific loan, you can opt for a personal loan to help finance your dream car.
Personal loans can be secured or unsecured (secured uses the car as collateral while unsecured does not) and used for various purposes, including car financing.
The T&Cs vary, depending on the lender’s policy and your creditworthiness.
Benefits and drawbacks
Any money transaction is always risky, and car financing is no different.
While financing allows you to afford your dream ride, you may face financial strain if you go wrong.
Here are some pros and cons of each type of financing.
You should familiarise yourself with each; choosing which option best suits your needs will be a breeze.
Which type of financing is best for you?
Objectively speaking, there’s no better option as each has advantages and disadvantages.
Ultimately, choosing which type of financing to go for will depend on your unique circumstances. Starting with your financial situation.
Use your income, expenses, savings, and credit history to determine how much you’re comfortable with spending.
Ideally, it would be best to go for financing that fits your budget.
Car loan
The wonderful thing about getting a car financed through a loan is that once you’ve completed your payments, ownership is entirely yours. And since the vehicle belongs to you, you can customise it as you please.
Need more than the standard features?
No problem; the car is yours to tinker with and tailor to your liking.
You’re also spoiled for choice because getting a car loan means you aren’t limited to buying a new or used car. But note that some lenders might look to minimise risk by placing an age cap on used cars – this is their way of ensuring the used vehicle will outlive the length of the loan.
Either way, multiple options are available for you to choose from.
And the payments are usually manageable.
A loan reduces the amount you spend upfront and instead spreads out the payments, making them more doable.
However, a drawback to opting for a car loan is that they typically have longer loan terms, especially when compared to other financing options like leasing.
That means you’ll have this commitment tied to you for at least 12 to 72 months.
And despite going for a vehicle well within your budget, repayments can still be quite steep. Not to mention the vehicle's almost instantaneous and rapid depreciation rate the minute you drive it off the dealership floor.
Car lease
Lease payments are typically lower than loan repayments for a new car. This allows you to get the latest or flashiest car at an affordable price.
Of course, that’ll also depend on things like sale price, rent charges, lease length, taxes and fees and the residual value (the car’s value at the end of the lease).
However, maintenance and repairs will be the least of your worries.
Most cars have a warranty of about three years. So, lease terms usually align with the manufacturer’s warranty meaning repairs are often taken care of for you.
Once the lease is up, you don’t have to worry about reselling the car but, instead, simply return it to the dealership.
On the downside, leasing a car is a glorified version of borrowing; the car is never really yours.
After the lease term ends, usually after 24 and 48 months, you’ll have to return the car, leaving you without a vehicle until you make an alternative plan.
Many lease agreements also have strict usage terms; for example, some may impose mileage restrictions and exceeding those might result in you incurring additional fees.
Fees may also include excessive wear and tear, modifications to the car and early termination.
Dealer finance
Convenience is the name of the game with this type of financing.
Financing with a dealership is easy because, unlike banks, all the paperwork is prepared for you. The finance and purchase of the car are done all in one place.
And in addition to that, you don’t have to wait for approval; financing is quick and seamless.
Some aspects of financing with a dealer are open for negotiation, so you don’t have to accept the first offer on the table.
Unfortunately, convenience does come at a cost.
You’ll find higher interest rates than those obtained directly from banks or credit unions.
Additionally, you’ll quickly realise that dealerships have limited financing options. Meaning it’s slim pickings when it comes to comparing fees and terms.
Lastly, dealership finance involves high-pressure negotiations. The salesperson and F&I (Finance and Insurance) are chasing their targets, so they’ll do whatever it takes to make that sale, including pressuring you into making the wrong decision.
Dealerships may push you towards specific financing options that benefit them more.
To determine the best type of finance for you, consider evaluating your financial situation, clearly defining your wants and needs, researching different options and comparing thoroughly.
If all else fails, consider consulting a professional financial advisor.
How Car Loans Work
A car loan is a financing option that lets you buy a vehicle without paying the total amount upfront by allowing you to borrow money to make the purchase.
How it works is you make payments over time until the loan is repaid, giving you ownership of the vehicle. The loan amount is typically based on the car's purchase price minus any deposit payment or trade-in value.
Usually, loan terms are 24 to 72 months, and you make monthly payments of the principal amount and interest.
The interest rate charged depends on factors like credit score and the loan term.
A deposit may be required upfront, but don’t panic; this could work in your favour.
Paying a deposit of at least 10% for a used car and 20% for a new car upfront, the recommended amounts, can help reduce the loan amount and may lower the interest charged.
For the best interest rates and loan terms, begin by researching and comparing offers from multiple lenders, such as banks, credit unions, or online lenders.
Be prepared to negotiate with lenders to secure the most favourable terms.
Pay attention to what’s being offered by considering the loan duration, deposit requirements, and any additional fees. Remember to read and understand all the terms and conditions of the loan before making a final decision.
Furthermore, a good credit history and a solid financial profile can increase your chances of qualifying for lower interest rates.
So, while waiting for financing feedback, you can start by fixing those areas that are within your control.
How much you can afford to spend on a car depends on your financial situation.
Your starting point should be assessing your budget and considering your monthly income, expenses, and savings goals.
From there, you can determine the amount you can comfortably allocate towards car payments without straining your finances.
Be careful not to overlook other costs associated with car ownership, like insurance, maintenance and repairs, and fuel.
To calculate your monthly payments, use an online loan calculator or financial tools that consider the loan amount, interest rate, and loan term.
How Car Leases Work
A car lease will let you have fun with your chosen car, but only for a specific period.
And sadly, all of this is without full ownership of the vehicle.
The manufacturer's warranty often covers maintenance and repairs during the lease term. However, at the end of the lease, you return the car to the dealership.
Leases typically range from 24 and 48 months.
And the cost of leasing depends on the sale price, rent charges, lease length, taxes, fees, and the car's residual value. Other potential fees associated with car leases include charges for excessive wear and tear, modifications to the vehicle, and early termination fees.
Leasing also comes with imposed limits on mileage, and exceeding those limits may result in more extra fees.
Getting the best lease terms include negotiating with dealerships and understanding the lease agreement.
When negotiating, inquire about any available incentives, discounts, or promotions that can help lower the lease cost.
After that, ensure you pay attention to the lease agreement's fine print.
Understanding the terms and conditions, including any fees, restrictions, and end-of-lease obligations, will help you make an informed decision and negotiate more effectively.
Lease payments are based on the vehicle's sale price, lease duration, interest rate, and residual value.
Firstly, consider your budget along with these factors to calculate your potential monthly payments.
Secondly, to determine whether a lease agreement suits you, consider your driving habits and whether you stay within the mileage limits set by the lease.
Additionally, evaluate if you prefer driving a new car every few years without ownership or whether you value long-term ownership with options for customisation.
Dealer Financing
When purchasing a vehicle, you can finance it through the dealership's financing department or through financing programmes offered by the manufacturer.
Dealership financing allows you to complete the entire car buying process, including choosing a vehicle and arranging funding, at one location.
And financing with a manufacturer may offer special incentives or promotional rates.
To secure this financing, you must submit a credit application.
At the same time, the dealership or manufacturer determines the loan terms, interest rate, and approval.
The benefits of dealership finance include convenience and quick and seamless financing without needing separate approval.
But like all things, every upside has its downside.
Dealer financing often comes with higher interest rates than loans from banks or credit unions.
Limited financing options may also make it difficult to compare fees and terms.
Additionally, high-pressure negotiations can occur, as dealerships aim to meet sales targets and may steer you towards financing options that benefit them more than you.
To negotiate dealer financing terms, being prepared and knowledgeable is essential.
Being informed and assertive during negotiations can help you secure more favourable terms and avoid surprises or misunderstandings.
Furthermore, aim to understand your creditworthiness and leverage it during negotiations.
At the same time, carefully review the fine print of the financing agreement, paying attention to details such as interest calculations, hidden costs, prepayment penalties, and warranty provisions.
If something is unclear or you have questions, don't hesitate to ask the dealership for clarification.
Financing Options for Bad Credit or No Credit
Options for first-time car buyers
Don’t worry about being a first-timer with bad or no credit; various financing options are available for you.
The solution to fixing a bad credit report is to improve your credit score.
Do this by disputing errors on your credit report, paying your bills on time, and lowering your credit usage amount.
You can also explore car loans specifically designed for first-time buyers or programmes offered by manufacturers. Some lenders offer special financing for people with bad or no credit history.
If that doesn’t work for you, an alternative is to get a co-signer, like a family member or trusted friend, who has good credit and can help secure the loan.
Conversely, should you fail to secure a traditional loan due to poor credit, try looking into alternative financing solutions like rent-to-own cars.
This option is viable because dealers don’t require you to show your credit score.
You only need proof of income, residence, and a valid driver’s license.
Tips for finding financing options
One thing to keep in mind is how beneficial working with lenders specialising in working with individuals who have bad or no credit is.
They have years of experience and expertise in assisting borrowers with challenging credit portfolios.
It’s also better to visit dealerships with pre-approval already being taken care of.
Pre-approval will give you a clear understanding of how much you can afford and the interest rates you qualify for and helps you negotiate fairly.
Family and friends can also be an untapped resource and provide some insight. Simply put, ask for recommendations from those you trust the most.
Lastly, using online resources; tools like auto loan comparison websites or online loan calculators can help you compare interest rates, estimate monthly payments, and evaluate financing scenarios.
The importance of building and maintaining good credit
Having and maintaining a good credit record is vital for any future car purchases you’re looking to make.
A strong credit history and a high credit score can significantly impact your ability to secure suitable financing terms.
Good credit demonstrates that you’re a responsible borrower, making you a less risky candidate for financing. You may be rewarded with lower interest rates and more flexible loan terms.
Good credit not only improves your chances of obtaining financing for a car but also opens up opportunities for better interest terms in other financial aspects of your life.
Building a good credit history involves making timely payments on all debts, keeping credit card balances low, and avoiding taking on unnecessary debt.
How to Get Approved for Car Financing
Factors lenders consider when approving car financing
- Credit score.
- Income and the debt-to-income ratio.
- Deposit amount.
- Loan amount, term and the loan-to-value ratio.
- Employment history.
Bear in mind that each lender may have specific criteria and weigh different factors differently when making approval decisions.
Offer tips for improving your chances of getting approved
Focusing on key areas will assist you in improving your chances of getting approved for car financing.
Your first step should be to pay existing debt. This can lower your debt-to-income ratio and improve your overall financial standing.
Next, it’s never a bad idea to earn more money.
Increasing your income through additional employment or seeking higher-paying opportunities can positively impact your loan approval chances.
And as mentioned earlier, building your credit can also enhance your creditworthiness, thereby improving your chances of getting financing approval.
You can do this by making timely payments on bills and existing debts, as well as using credit responsibly can also enhance your creditworthiness.
What to expect during the application and approval process
Expect to be asked to provide numerous things starting with documents and ending with honesty.
First, gather the necessary documents, such as proof of income, identification, and residence. Then, complete the loan application, providing detailed and accurate information.
From there, lenders will evaluate your application, considering factors like your credit score, income, and debt-to-income ratio.
They may even request additional documentation or information if needed.
After reviewing your application, the lender will approve or deny the loan. You will receive the terms and conditions, including loan duration, interest rates, and monthly payments, if approved.
Carefully review and understand these terms before accepting the loan offer.
Understanding the Fine Print
Reading and understanding the fine print
Understanding the fine print of car financing agreements is crucial to protect your interests.
Carefully reviewing the fine print ensures you fully comprehend the financial obligations and commitments associated with the loan.
The fine print commonly contains vital details about the loan terms, including interest rates, loan duration, fees, and potential penalties.
Overall, understanding the terms helps you make informed decisions.
That way, you can avoid surprises and assess the overall affordability and suitability of the financing agreement for your financial situation.
Tips for identifying and avoiding hidden fees or terms
Consider any additional charges in your contract, such as origination fees, prepayment penalties, or documentation fees. Also, watch out for unnecessary add-ons or extended warranties that may increase the cost of the loan.
Knowing this will assist you in understanding the consequences of late payments or defaulting on the loan.
If anything seems unclear, ask for clarification or seek professional advice to ensure you know all the fees and terms involved.
Comparison is also your friend during this time.
Compare the terms different lenders offer to spot any significant discrepancies or red flags.
How to negotiate and clarify any confusing or unfair terms
Rule number one of negotiation is ‘don't hesitate to speak up and advocate for yourself.’
Remember that negotiation is a part of the process. It's crucial to feel comfortable before signing the agreement.
If you believe specific terms may be unfair, express your concerns and propose more reasonable alternatives.
Be prepared to negotiate the loan terms, like interest rates, loan duration, or any fees that you find unreasonable. Ask for explanations or elaborations on any provisions in the agreement that you need help understanding.
Also, make sure to ask for clarification on any vague or ambiguous language to ensure you have a clear understanding of your obligations.
A Final Word
When financing a car, you must be well-informed and make decisions that align with your financial goals.
Throughout this guide, you’ve learned of various financing options, including car loans, leases, and dealer financing, along with their benefits and drawbacks.
We also exposed you to the factors lenders consider when approving car financing and offered tips for finding the best rates and terms.
All-in-all, what’s most crucial is to take your time, shop around, and compare offers from different lenders to secure the most favourable financing terms for your situation.
As you embark on the car financing journey, remember to carefully read and understand the fine print of any agreements and identify and avoid hidden fees or unfavourable terms.
Naturally, this will protect your financial well-being.
Before signing, negotiate and clarify any confusing or unfair provisions to ensure you're comfortable with the terms.
Once you've obtained financing, it's vital to maintain your car payments responsibly.
Take pride in your vehicle, enjoy its benefits, and prioritise regular maintenance to keep it in good condition.
Effective budgeting is the best way to do this, and staying on top of your financial obligations will ensure a smooth car ownership experience.
If you’ve heeded our call and followed the rules and regulations in this guide, you'll be well-equipped to make informed decisions.
Leading to securing favourable financing terms and enjoying your car while staying on track with your payments.
Approach your car financing journey with patience and careful consideration to ensure a positive and rewarding experience.
Talking about positive experiences... get a quote in less than 90 seconds!
Pineapple (FSP 48650) is underwritten by Old Mutual Alternative Risk Transfer Insure Limited, a licensed Non-Life Insurer and authorised FSP. T&Cs apply. Premium is risk profile dependent.
Please Note: The information provided above is for informational purposes only; you should not construe any such information as legal or financial advice.
Team Pineapple
Team Pineapple comprises our company’s top talents, who are dedicated to creating clear, high-quality content on essential vehicle insurance topics. This diverse group, including actuaries, accountants, data scientists, and insurance professionals across South Africa, collaborates to produce enlightening and empowering articles.
Each piece is thoroughly researched, factually accurate, and rigorously reviewed to ensure quality.
*We say they’re the finest because we want them to keep writing for us!
