The first step for those entering the workplace and obtaining independence, is often to look at getting a car of their own to ensure they get to work on time.
Cars are one of the largest financial decisions people will make and financial assistance is usually required, even when buying a second-hand car.
The solution is a vehicle loan offered by the numerous banks and other financial institutions. Like with most things there are a few choices when it comes to exactly how you may want to finance your new dream vehicle and which one you choose will depend on your personal financial situation.
This is the most common form of vehicle finance, and the one most people think of when it comes to paying off their car. The cost of the vehicle, together with any registration fees is loaned to the owner on the basis that they then pay off the amount, plus interest, over the next few years.
The length of the offered loan term will depend on the vehicle itself, and the owner’s ability to repay the loan and can be as long as six years. The buyer will then repay the loan at a set rate each month for the full length of the loan. The longer the term, the lower the monthly instalment will be, but the interest will increase proportionally to the length of the contract.
It is therefore wise to try and increase the amount paid each month and shorten the length of the loan provided you can afford it.
A balloon payment loan is very similar to a normal instalment loan with the difference being that a portion of the loan amount is set aside to be paid as a lump sum at the end of the loan.
This kind of loan is designed to help those who may not have the cashflow at the beginning of the loan to afford the vehicle in question and allows the buyer to pay lower monthly payments for the duration of the loan.
The downside is that it is extremely easy for a buyer to forget about the balloon payment or not plan adequately to pay it off at the end of the loan leading to a situation where they need to take a brand new loan to pay off the balloon payment.
Buyers who opt for a balloon payment option should save each month toward that eventual balloon payment , so that they can settle the balloon payment in full when it is due, and not refinance the balloon payment as this will result in paying more unnecessary interest.
Guaranteed Future Value
A Guaranteed Future Value (GFV) loan should only be considered by those drivers who know they will not be driving great distances and are certain they can keep their car in top condition. In a GFV deal the future value of the car at the end of the loan period is calculated at the beginning of the loan.
The bank and the new buyer will agree on a maximum distance driven, and the condition of the vehicle at the end of the loan in advance. At the end of the pre-determined contract term, and provided the car meets those agreed standards, GFV customers have three choices: they can either enter into another GFV deal and drive away in a new vehicle, settle the outstanding balance to own the vehicle, or simply return the vehicle to a respective dealership and walk away.
This is a great solution for people who don’t necessarily want to own the vehicle at the end of the contract and simply want its use for the duration of the contract. It is, however, somewhat risky as any failure on the driver’s part to meet the agreed vehicle condition, or maximum driving distances often comes with severe penalties.
At the end of the day, no matter what loan option you choose, it is wise to bring as large a deposit as possible to the deal, as doing so will lower your monthly payments, and the interest you are required to pay on the loan overall.