Car finance, assisted purchase, or vehicle loans (or whichever actionable buzzword gets you going) is a truly miraculous thing! It helps everyday South Africans stretch their pockets into the front seats of the latest models of dream cars they couldn't afford otherwise. That is a truly wonderful thing, indeed. Or is it?
Well, two of the car loan industry's most popular strategies (big lies) are the No Deposit and Longer Term 'incentive'. But both 'incentives' only lock consumers into more extended contracts and transfers more risk to them while pushing the perception of affordability.
No deposit is the first big lie in Vehicle Finance.
“No deposit! Drive it now, only start paying next year”. You’ve probably heard it all! This is called instalment finance with a balloon (sounds like a party, but it's not) payment. Essentially, it means a portion of the purchase price is set aside so that the repayments are calculated on a lower amount.
And after years of paying the ‘lower’ instalment, you get to the end of your contract term, and the car is finally… still not yours! So, what now? The amount set aside to bring down your monthly instalment is now centre stage. That’s when the balloon pops.
Simply put, balloon payments are like deposits you pay at the end of the car loan and not at the beginning.
Longer = less is the second big lie in Vehicle Finance.
This is what is called the negative equity trap! Our dreams and goals are good because they set a clear path forward. On the other hand, our dreams of car ownership can blind us to the harsh realities of the negative equity trap.
Negative equity arises when the amount owed to the bank exceeds the car's value. More and more South Africans sign up for six-year car loans to keep up with rising car prices. While longer repayment terms appeal at face value, they saddle consumers with negative equity for longer.
The ugly truth about how car finance works in SA.
Rising interest rates, longer loan terms and growing balloon payments can steer you into negative equity. And no deposit means bigger balloon payments. While the car industry grows, you may drive away with most of the risks and a depreciating asset. Remember that your car dealer may be incentivised to promote certain car loans and other related products.
We recommend doing your independent (and extensive) research about how the car will depreciate. Investigate the most favourable financing structure for you and the cost of keeping the vehicle operational during the loan term.
You should also read: The truth about how your age affects your car insurance premium.
