Benefit from residual car finance

Dear Morgan

Dear Morgan

I need to buy a new car, but am not sure which option to go for with the finance. Please tell me about "residual" and whether it's a good thing? - KK

Dear KK

There are many options when it comes to financing a car, but whichever you choose, you need to make sure that you can afford the monthly repayments as well as the costs of fuel and insurance.

Now, apart from instalment sale agreements, lease agreements and so forth, the residual option either confuses people or puts them off altogether.

The residual option is a structured payment. Let's say you buy a car worth R100000 with a 40percent residual. All this means is that you repay the capital and interest on R60000 or 60percent while only servicing the interest on the R40000 or 40percent.

You do not have repayment instalments for 40percent of the vehicle price, which should bring down your monthly repayments, compared to what you would have paid on the full value.

By the end of the repayment term, you would still owe the bank the R40000 which you can either pay off as a lump sum or else re-finance. Some manufacturers and dealers now offer guaranteed buy-backs which secure the repurchase of the car from you, but with conditions such as limited mileage and the vehicle being returned in good condition.