Understanding which vehicle finance options are best for you

The world of car finance can be a confusing and daunting place.
The world of car finance can be a confusing and daunting place.
Image: Ekachai Lohacamonchai / 123rf

When buying a new or used car, one of the many choices you will be faced with is how to finance it. This decision can be daunting; with various options to choose from it can be difficult to decipher which is right for you. 

It is important to not let the excitement of driving off in your new ride prevent you from researching which finance option is going to be best. Consideration should be given to your lifestyle, budget, and credit history. Know and understand all the options available to you so that you can make an informed decision.

Here Imperial Auto helps you decipher three of the most common finance options: 

1. Guaranteed Future Value (GFV)

This is becoming an increasingly popular form of car finance in SA. It is important to note that a vehicle’s value begins depreciating (losing monetary value) the moment it leaves the showroom floor. In line with this depreciation, a GFV plan calculates what the future monetary value of a car will be provided the condition, mileage and maintenance agreements are adhered to. This future value is guaranteed at the start of the agreement. 

This makes planning ahead easier, as you will know exactly what your car will be worth once the predetermined contract term (usually between three and four years) is reached. At the end of the contract you are given three choices:    

  • Enter another GFV deal and drive away in a new vehicle
  • Settle the outstanding amount and own the car     
  • Or simply return the vehicle to the respective dealership and walk away (provided the allotted mileage was not exceeded and the vehicle is in acceptable condition)   

2. Instalment finance 

This is the most straightforward of the vehicle finance options. Monthly repayments are calculated on the purchase price of your car less whatever deposit is put down at the start of the deal. Finance terms can be structured into time frames of between 12 and 96 months. The longer the term, the lower the monthly repayment will be, but be advised that interest will add up over longer terms and the total amount repaid to the bank will increase equivalently. 

3. Instalment finance with a balloon payment

This option is similar to instalment finance, except a portion of the purchase price is set aside so that the repayments are calculated on a lower amount. In short, a balloon payment is exactly the same as paying a deposit on a motor vehicle, but with one very important difference: A deposit is paid up front, while a balloon payment is paid at the end of the finance period. 

While it may be attractive to have lower monthly repayments, you should be cautious of the amount that would be needed for the balloon payment. The repayment of a balloon can be an inconvenient debt as this amount will either need to be settled or refinanced at the end of the deal. 

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