Few things in life can compare to the joy of buying a new car. The feeling is compounded when it’s one’s very first dream car. Getting behind the wheel of that dream car, however, requires a level of liquidity or financial muscle that most people just don’t have.

To bridge this affordability gap, banks have developed a number of vehicle finance products and services to suit different customers’ needs.

Popular options

Instalment finance

This is the most common of all vehicle finance options. Monthly repayments or instalments are calculated on the purchase price of a vehicle, minus whatever deposit is put down by the car buyer at the start of the finance contract. The finance term is structured into terms of between 12 and 96 months. The longer the term, the lower the monthly repayment will be. But there is interest to consider, which is charged until the end of the contract.

Instalment finance with a balloon payment

The instalment finance contract with a balloon payment is similar to the traditional instalment finance deal, except that a portion of the purchase price – up to 35 percent – is set aside until the end of the finance term. This is done to bring down the monthly repayments as they are calculated on a lower amount. Simply put, a balloon payment is similar to a deposit, except that it’s payable at the end of a finance term instead of the beginning.

“Buyers must be cautious of the amount put into a balloon because they will be responsible for the lump-sum when the finance term comes to an end,” says Lebo Gaoaketse, Head of Marketing and Communication at WesBank. “Customers also need to be aware that interest on a balloon payment finance contract is calculated on the full vehicle purchase price, including the portion set aside as a balloon amount.

“It is advisable, therefore, for customers who choose the balloon payment option to set aside some of the funds they save on monthly instalments, to ensuring readiness for the balloon payment when it falls due.”

Where the customer is able to settle the balloon amount at the end of the finance term, no further interest is charged on the balloon amount. Alternatively, the balloon amount can be refinanced. If the customer chooses to refinance the balloon amount, interest will be calculated for the new finance contract and charged from the start until the end of the new finance contract.

Guaranteed Future Value

Guaranteed Future Value (GFV) is becoming an increasingly popular form of vehicle finance in South Africa. As a vehicle ages, its value starts depreciating from the moment it leaves the showroom floor. In line with this depreciation, a GFV plan calculates what the future monetary value of a vehicle will be if specific conditions are met, including mileage and maintenance. This future value is guaranteed at the start of the agreement.

This makes planning ahead easier as the customer knows exactly what their car will be worth once the pre-determined contract term (usually between three and four years) ends. The customer is given three choices at this point – they can either enter into another GFV deal and drive away in a new vehicle, settle the outstanding amount and own the vehicle, or simply return the vehicle to the respective dealership and walk away, provided the driver didn’t exceed the allotted mileage and the vehicle is in good condition.

“With a GFV contract, the consumer is essentially only paying for the use of the vehicle. This is why it’s important to know more or less the distance that the vehicle will travel during the GFV term. Penalties may be incurred if the conditions of the GFV contract are not met,” adds Gaoaketse.

“Regardless of which finance option is chosen, it is always important to carefully read the contract before signing on the dotted line,” advises Gaoaketse, “and remember that any value-added products and services, such as an extended service or maintenance plan, anti-smash and grab film, a canopy or aftermarket rims, added to the finance contract will affect the monthly instalment and may attract interest.”

Every WesBank-approved car dealership has a Finance and Insurance (F&I) executive to inform and assist car buyers in navigating all these variables.