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Don’t Get Taken for a Ride
Buying a car is an emotional experience. The smell of the leather, the shiny paintwork, the test drive—it’s easy to get swept up in the excitement. But for many South Africans, the car finance contract they sign becomes a financial albatross around their neck for 72 months. Salespeople are experts at selling you a “monthly installment” you can afford, often by hiding the true cost of the deal. Let’s strip the engine and look at how car finance really works.
The Balloon Payment (Residual) Trap
This is the most common way dealers make expensive cars look affordable.
What it is: A balloon payment is a lump sum (often 30% or 40% of the car’s value) that you agree to pay at the end of the loan term.
The Danger: You pay a lower monthly installment for 5 or 6 years. But when the contract ends, you still owe the bank R100,000 or R200,000. If you don’t have that cash, you have to refinance the balloon (taking out a new loan on an old car) or sell the car.
The Reality: Often, the car depreciates faster than the loan pays down. You might reach the end of the term and find the car is worth less than the balloon payment you owe. This is a financial disaster. Avoid balloons unless absolutely necessary.
Interest Rates: Linked vs. Fixed
Just like with home loans, you can choose.
Linked Rate: Fluctuates with the prime lending rate. Usually starts lower than a fixed rate.
Fixed Rate: You pay a premium for certainty.
Tip: Car finance rates are negotiable! The dealer gets a commission for signing you up with specific banks. Don’t accept the first rate (e.g., Prime + 2%). If you have a good credit score, fight for Prime or even below Prime. Getting a pre-approved quote from your own bank gives you leverage on the showroom floor.
The Term: 72 Months vs. 96 Months
In the past, 54 or 60 months (5 years) was standard. Now, banks are offering 72 months (6 years) and even 96 months (8 years) to lower the monthly repayment.
The Cost: The longer the term, the more interest you pay. A car paid off over 96 months will cost you vastly more than one paid off in 60. Plus, you will be driving an 8-year-old car that might need expensive repairs while you are still paying it off.
Deposit is King
Putting down a deposit (10% or 20%) changes everything.
- It lowers your monthly repayment.
- It lowers the total interest paid.
- It ensures you have positive equity (the car is worth more than you owe) much sooner.
If you can’t afford a deposit, you probably can’t afford the car.
Insurance and Extras
Dealers will try to sell you “Value Added Products” (VAPS) like tyre-and-rim cover, scratch-and-dent cover, and extended warranties. While useful, they are often overpriced when bought from the dealer and added to your finance (meaning you pay interest on them!). Shop around. You can often buy these policies separately for cash at a cheaper rate.
Conclusion
Buy the car you can afford, not the one the bank says you qualify for. Avoid balloon payments, put down a deposit, and negotiate the interest rate. Your future self will thank you when you actually own the car, rather than just renting it from the bank.
