Owning a car isn’t as easy as it may seem, but with the correct help from financial institutions like banks, it is possible.
Here are a few things that you need to know if you are planning to own some new wheels:
Balloon Payment Or Residual Value
A large percentage of car owners buy their cars on loans and some of them find it hard to keep up with monthly installments. As a result of this, the banks have come up with a different plan called Balloon Payment or Residual Value that makes it affordable for customers to buy cars on loan by lowering their monthly installments.
What Is A Balloon Payment?
This is the lump sum (a single payment of money) that you ask the bank to subtract from your original debt to lower your monthly installments. You will then pay back the lump sum at the end of all your installments. When you apply for car finance, you have to decide whether you need a balloon payment or not, and if so, at what percentage. The maximum percentage on a new car is 35% and 20% on used cars. For example; if you are buying a car worth R100 000 to be paid off over 60 months, you may find that the monthly installments are too high. Taking a balloon payment of 35% (R35 000) will lower your monthly installments (since you are only paying off R65 000) and the balloon payment of R35 000 will be paid as your last installment. For used cars, this option is limited to cars that are not more than three years old.
How It Is Paid
There are three options for paying back balloon payments. If you want to keep your car, you can use the first two options below, but if you want to change it, you can use the third option.
- You can pay the whole amount at once.
- You can apply to the bank to re-finance you for this amount, and the repayment period is between 12 to 36 months.
- You can trade in the car and take the money to settle the balloon payment. The surplus (money leftover after payment) can be used towards the deposit of the new vehicle.
Prime rate+ and Prime rate-
Generally, the prime rate is the interest the bank charges their clients and this is linked to the repo rate (interest charged by Reserve Bank when lending commercial banks money) meaning that any change to the repo rate affects the prime rate. We all have different credit records. When the bank lends money to a high risk customer (one with no or bad credit history) they will charge more interest, known as prime rate+, e.g. prime rate+ 1 means the bank will charge the normal interest rate plus one percent. Also there are people with good credit records and the bank will charge them interest below prime rate known as prime rate-, e.g. prime rate- 1, means the bank will charge the normal interest rate minus one percent.
Metallic Paint Fee
Metallic paint is a very expensive paint and as a result some car manufacturers charge a premium (extra payment) for it. This charge applies only to brand new cars. In most cases, metallic paint is an optional extra.
On The Road Charges
This is like an admin fee. It covers things like car registration, number plates, car inspection, gifts, petrol etc. This is a once-off compulsory fee. It is normally between R2 000 to R3 000.
Emission Or Green Tax
As from 1 September 2010, new passenger vehicles are forced to pay CO2 (Carbon Dioxide considered harmful to the environment when coming from cars) emission tax of R75 for each g/km (grams per kilometer; unit of measuring CO2 emission) above 120g/km. This tax is already included to the retail price of the car. The reason for the introduction of this tax was to encourage South Africans to consider using energy efficient and environmentally friendly cars.
In terms of the New Credit Act, it is no longer compulsory to pay a deposit when you purchase on credit and this also applies to cars. However this doesn’t stop you from paying it if you wish as this will lower your monthly installments.
Remember that when you purchase a car on loan, that car remains the property of the bank until you settle your loan. For the bank to lower the risk of losing both money and the car should anything happen, they require you to have complete insurance cover for the car before it can be delivered to you. By Moeketsi Letsohla Pictures Thinkstock Images Sources www.strattonfinance.com, GM Hyde Park