Financing a Car? Interest rates, loan terms and balloon payments explained.

Financing a Car? A few things you need to know first.

Financing a car

Car Financing doesn’t have to be complicated. In fact it can be quite straight forward. Most people can’t buy a car for cash, so they lend the money required to buy the car from a financial institution and agree to pay it back over a certain period of time. The financial institution then charges people interest on the loan amount, that’s how they make money.

Here are a few things you should know when financing a car:

The Interest Rate of your vehicle finance agreement

The interest rate is a very important number when financing a car. It will determine how much interest you will pay on your car loan. When it comes to interest rate you have two options. You either go for a fixed or a linked interest rate.
Fixed Rate
A fixed interest rate means that the interest rate will be fixed and stay the same for the duration of your agreement. This is useful in an unstable economy where the interest rate fluctuates because it guarantees that your monthly installment will stay the same throughout your car finance agreement.
Linked Rate
The second option is to have a linked interest rate. A linked interest rate is linked to the prime lending rate of a country. So if the prime lending rate decreases then your monthly installment will decrease too and if the prime lending rate increases then your monthly installment will do the same.  Consider linked interest rates if you have some breathing room in your budget because your monthly installment will differ from time to time.
Example: Interest rates
If you finance a car of R200 000 over a period of 60 months and your interest rate is 10% then the monthly installments will be R4249.41 and the total finance amount would be R254 964.60.

If you finance that same car but at an interest rate of 15% then the monthly installments would be R4758.99 and the total finance amount would be R285 539.40.

So between an interest rate of 10% and 15% you get a difference of R509.58 per month or R30 574.80 on the total finance amount. Therefore it is crucial that you make sure you get the lowest interest rate possible.


The Finance term of your car loan agreement

The vehicle finance term is the period of time over which you will pay back the car loan. In South Africa the car finance terms usually range between 12 and 72 months. Obviously the longer your vehicle finance term the smaller your monthly instalments will be but also worth noting is that you will pay more interest on longer car finance terms.
Example: Finance terms

If you finance a vehicle of R200 000 over a period of 60 months at a 10% interest rate, then your total finance amount will be R254 964.60 or R4249.41 per month.

If you finance that same car but over a longer period of 72 months at a 10% interest rate, then your total finance amount will be R266 722.24 or R3705.17 per month.

So although longer vehicle finance terms enable you to save on your monthly instalment you will end up paying more and paying for longer. Remember you only own the car once your final monthly payment has been made.

Vehicle Finance Agreements that include a Balloon Payment

A balloon payment is a way to shift a percentage of the car loan to the end of the loan agreement. This enables you to have lower monthly instalments because your monthly payment is calculated on the loan amount minus the balloon amount. Once you get to the end of your new car finance agreement you will then either have to settle the final balloon amount, refinance the balloon amount or sell the vehicle to settle the balloon amount.
Example: Balloon payments

If you buy a R200 000 vehicle on a 72 month finance term at a 10% interest rate, then your total vehicle finance amount will be R266 722.24 or R3705.17 per month.

If you buy that same vehicle at a 10% interest rate over 72 months but with a 30% balloon payment, then the monthly instalment will be R3093.62 but you will still owe R60 000 at the end of the 72 month period.

Car finance deals that involve balloon payments generally allow people to get finance for a car that they could otherwise not afford because the monthly payments are lower. Balloon payments are not always the best solution though, so do your research and find out if a balloon payment is a wise choice for you.

Need help Financing a Car? Let Super Group Dealerships help you.

Supergroup Dealerships have an online Vehicle Finance Application form  to make applying for vehicle finance as easy as possible.

You can also make use of our qualified and experienced Finance and Insurance Manager that can arrange your finance and insurance to ensure you receive the best deal possible for your financial profile. Please feel free to contact us for assistance, queries or product advice.

Show some love and click "Like" or Share this article with a friend!

Content Randomiser