I AM a 26-year-old male planning to buy my first car. I am in training and my nett pay is R10600 a month.

I AM a 26-year-old male planning to buy my first car. I am in training and my nett pay is R10600 a month.

I want to buy a used car between R100000 and R120000 with a down-payment of 10 percent. How much can I expect to pay a month including insurance? Can I buy the car without insurance? I am considering private sellers.

Stephen

You are approaching the adventure of buying your first car in the right way, by doing the planning and the calculations carefully beforehand.

Let's say you buy a car costing R110000 after you have negotiated with the seller. (It's a buyer's market in the motor industry at the moment, and sellers will often agree to a substantial cut in the advertised price just to clinch a deal.

Alternatively, if a dealer stands firm on the sticker price, he may be willing to throw in extras like a sound system or a gear lock for free if you play your cards right.)

You put down a deposit of R11000. The balance of R99000 is financed by a hire-purchase loan, and if that is repayable over 60 months at an interest rate of 15,5percent a year, the monthly instalment comes to about R2450. If, for example, the interest rate rises to 17,5 percent halfway through the 60 months, the instalments will increase to about R2500 for the remaining 30 months.

Comprehensive insurance is compulsory in hire-purchase transactions, but you have the option of arranging insurance yourself with an insurer of your choice. A private seller can sometimes be a better option than a dealer, but unless you know enough about cars to check out a used car quickly and accurately, there is a considerable risk factor.

I WOULD like to get some advice here. I bought my new car in September 2007 and have been paying it off for two years.

When I bought it, I didn't have a deposit and they told me that if I want to keep it to be mine, I will have to pay a balloon payment of about R20000 to R40000 in cash at the end of the loan term, or I could even pay it annually until it is paid up.

My outstanding balance on the hire-purchase loan is R132000, which needs to be paid off over the next three years. The car has done about 78000km. I don't know whether I should start with the balloon payment or not, because I don't even know if I will trade in this car or keep it.

Peter

You will get no reduction in the balloon payment by settling it in part or in full before its due date.

If you wish to start making provision for the eventual balloon payment, it would therefore be better to deposit whatever money you have available for this purpose into a separate savings account so that at least it will earn some interest while you build up the funds to make the balloon payment when it becomes due. That's how balloon payments work.

If you settle early, you get no reduction on the pre-calculated interest that is part of the residual. If you cannot settle a balloon payment when it falls due, you can try to negotiate with the bank to re-finance it over a further period (say two years), but then additional interest will be payable.

The decision whether to trade in or keep the car depends on many factors - the trade-in value, your personal feelings about the car or your financial position. Most financial advisers consider it uneconomical to trade in a car bought on hire-purchase with a residual, before at least four years have passed.