3 Ways to Finance your Next Car
What are the advantages and disadvantages of the different financing options on offer to motorists?
Buying a new car is an exciting time for any motorist and in most cases the only way motorists can afford a new car is by way of a financing agreement
There are a variety of financing options available and motorists should carefully consider the advantages and disadvantages of each solution before deciding which is the best option for their budget and needs.
An installment sale is an agreement between yourself and the bank who purchases the vehicle of your choice on your behalf and then lets you pay off that vehicle over a negotiated period at an agreed interest rate.
In most cases you will need to put down a deposit, but this is not always the case. However the larger your deposit, the lower the financing amount and monthly payments will be, so it does help to save up towards a deposit in the lead up to buying a new car.
An installment sale will see you pay off a vehicle on a monthly basis for a predetermined period. This period could be anything from three to six years depending on how the deal is structured and your budget. There is also the option of a balloon payment at the end of the term, which will reduce the monthly instalments but will mean that at the end of the financing term you will still owe a significant amount. You will need to come up with a way of settling this amount, either by selling the vehicle or refinancing the remaining amount.
There are generally two options regarding the agreed interest rate of this loan. A linked-rate option will fluctuate along with the national interest rate. So if that increases during the agreement period, your interest rate and therefore your repayments will increase. Similarly, if the interest rate decreases during the agreed period, you will benefit from lower repayments.
A fixed rate option provides protection from fluctuating interest rates, as your interest rate will remain the same throughout the agreed period. The advantages of an installment sale include the fact that the vehicle becomes your property once the last payment is made and there are no limitations to vehicle use, such as mileage restrictions.
There are also some disadvantages. A car’s value starts dropping the moment you drive it off the showroom floor, which doesn't make it a great asset and because the car is essentially yours, the servicing and insurance costs will be solely your responsibility.
Full maintenance lease
The full maintenance lease option sees you rent your vehicle for an agreed period. Your monthly fee will cover all maintenance costs including service and maintenance. At the end of the term you simply hand the car back.
Advantages include a monthly payment that will be much lower compared to that of an installment sale. You will also be able to drive a new car more often without the hassle of trading in or selling your old car.
There are however some disadvantages. Even though you pay for it every month, you never actually own the vehicle. Furthermore a full maintenance lease very often contains strict limits on the maximum number of kilometers which you are allowed to drive, meaning that you won't be able to frequently go on long trips.
Guarenteed buy back
A guaranteed buyback is a similar to an instalment sale with the added benefit that the bank and the buyer agree on a value that the car can be bought back for at the end of the payment period and that is added as a balloon payment at the end of the loan period. The dealership guarantees that should the contract conditions, which will include factors such as mileage, be adhered to, they will buy back the vehicle at the end of the term and guarantee payment of the balloon value.
The guaranteed buy back option allows consumers to make use of a structure similar to a lease, with lower monthly payments and a shorter contract period. The downside is that you will not own the car outright at the end of this loan period, but you will also not be responsible for selling it in order to settle the outstanding amount.