Learn the 6 basics of vehicle finance terminology

Feb 04, 2019

We recently launched our VEHICLE FINANCE product page to help people all over South Africa make a better vehicle finance decision! In the next few weeks, we're going to give you the full low-down on all things vehicle finance, so stay tuned for more after this article.

Do the following 2 things to help us help others:

  1. Visit our Vehicle Finance page and try out the process! It's completely free
  2. Share this with a friend or family member who needs vehicle finance

What is Vehicle Finance?

Vehicle Finance, car finance or a car loan, is a type of loan you get from a bank, vehicle dealer or specific vehicle finance company. Vehicle finance or a car loan is specifically tailored for individuals who cannot or do not want to take on the huge once-off expense of a car. This enables most individuals and families to enjoy a set of wheels to fulfil their needs or even a driving dream!

Vehicle finance is the quickest and simplest way to get access to a vehicle you can one day own. This is done with a lower interest rate compared to other personal loans and usually a much longer repayment period. The financial institution will own the vehicle until you have paid your very last monthly instalment and any outstanding debt (like a balloon payment).

Monthly instalments make it possible for many South Africans to have their own personal method of transport without using all their precious savings that can rather build an asset. Your monthly instalment will be an amount calculated using the cost of the vehicle, your available deposit amount, the interest rate and the time period over which you are able to pay it off.

Understanding basics like balloon payments, interest rates, deposits, and your capital balance

Interest Rates

The interest rate is effectively the cost of a loan. It is the interest you pay of top of the money you have to pay back and is the source of income a financial institution gets for lending you money. When you borrow money or finance a car, it will be financed over a certain time period at a certain interest rate. There are two types of interest rates.

Fixed interest rate

The vehicle finance agreement will have a locked in interest rate and cannot change during the loan repayment term.

Variable interest rate

A variable interest rate will be linked to the national prime rate and can move up and down as the prime rate goes up or down.

Balloon payments or residual purchase agreements

You can choose to only finance a certain percentage of the total cost of the vehicle and pay the remainder on the final settlement date when the car loan repayment term ends. This percentage usually ranges between 15% - 35% and is usually influenced by the age of the vehicle as well. The balloon amount usually results in a big chunk of money you have to cover at the end or you will not get ownership of the car.

Deposit

The deposit you pay on a car is the amount of savings or money you have available as a "starter amount" and reduces the capital amount you have to finance.

Capital balance versus contract balance

The capital balance is the amount you borrowed but it excludes the future interest rate you will pay in monthly instalments. It is the amount you will have to pay if you want to settle the contract. The contract balance is the amount you borrowed plus all the interest calculated onto that amount and it is what you will pay in total for the vehicle if you finance it for the full term.

Next week, we'll delve into the types of vehicle finance you get and explain how the process works! Get started with vehicle finance by clicking here.

Never miss any Financial News, subscribe to the Fincheck newsletter and stay informed