BUYING ADVICE | What is the best way to finance a car?

When shopping for your dream car, it’s advisable to understand the various finance options available prior to making that buying decision.

Often, as a result of elevated excitement, consumers don’t ask enough informed questions during the purchasing process. Here, WesBank provides an outline of the options to help consumers select a plan that suits their affordability:

Guaranteed future value (GFV)

This has become an increasingly popular form of vehicle finance and appeals to the customers interested in "usership" of the vehicle versus full ownership.

A GFV plan calculates the future monetary value of a vehicle, provided the vehicle condition, mileage and maintenance agreements are adhered to. This guaranteed future value helps consumers know exactly what their car will be worth once the predetermined contract term, which is usually between three and four years, is reached.

At the end of the predetermined contract term, the customer can either settle the outstanding amount and own the vehicle, return the vehicle to the dealership and walk away, or enter into another GFV deal and drive away in a new vehicle — provided the driver didn’t exceed the prearranged mileage and the vehicle is in an acceptable condition according to the agreed terms.

Instalment finance

This is the most straightforward of all available vehicle finance options. Monthly repayments are calculated on the purchase price of a vehicle, minus whatever deposit is put down at the commencement of the deal.

Finance terms can be structured into time frames of between 12 and 72 months. The longer the term, the lower the monthly repayment will be. However, interest will add up over longer terms and the total amount repaid to the bank will increase proportionally.

Instalment finance with a balloon payment

This option is similar to instalment finance, except a portion of the purchase price is set aside so that the repayments are calculated on a lower amount. Simply put, a balloon payment is similar to a deposit, except it’s payable at the end of a term instead of at the beginning.

Consumers must be cautious and aware of the amount put into a balloon because they will be responsible for the lump sum at the end of the term agreement. While it may be attractive to have lower monthly repayments because a larger chunk of the purchase price is placed into a balloon, the repayment of a balloon can be an inconvenient debt as this amount will either need to be settled or refinanced at the end of the deal.