Understanding everything there is to know about vehicle finance

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Understanding everything there is to know about vehicle finance

Financing a car is an exciting, stressful and sometimes overwhelming experience. Especially when you don’t understand the terms that banks and car dealers are throwing at you and all you really want is to have the keys in your hand and not worry about the finance process.

But it’s unavoidable and something that you have to go through when getting your own car. With a little bit of explanation, this rewarding yet stressful process can be overcome and you’ll be in-the-know of exactly what the salesperson is talking about.


Fixed, linked and prime interest rate

An interest rate is the rate at which interest accumulates during your contract term. And interest is what you owe the financial institution on top of the cost of the car, when you take out and pay off a loan.

A fixed interest rate means that your interest rate will not increase or decrease during the period of your financing contract and you will be able to accurately calculate exactly what your overall cost is at the end of the loan repayment.

A linked interest rate, on the other hand, is linked to the prime lending rate, which may fluctuate during the agreement period. And the prime interest rate is the lowest possible rate of interest that can be charged by commercial banks. Prime interest rate fluctuates according to supply and demand for funds.   


Trade-in value

Certain dealerships may offer you a trade-in deal where you can trade-in your current car and the value amount of what they say your car is worth will be deducted from the cost of the new vehicle you’re interested in buying. Meaning your monthly installments will be a smaller amount.

As convenient as selling your old car on the spot is, trade-in values aren’t always a true reflection of what your car may be worth on other markets.



Installments are the payments you will be making according to your vehicle finance contract or lease agreement. These are normally paid on a monthly basis and are calculated depending on the number of years you wish to pay off your car loan and the interest rate at which you’re charged.


Lease agreement

Signing a lease agreement will get the keys into your hands, but it won’t make the car yours at the end of it all. This is your other option instead of taking out a loan and paying it back. And the reason you would rather lease a vehicle over buying one is that your monthly payments will be lower as a result of you paying only for the depreciation value of the vehicle and not the cost of the vehicle itself.  

When the contracted period of the lease agreement ends, you will either have to return the vehicle to the bank or owner of the vehicle, or you will have to buy it from them.


Hire purchase

A hire purchase is the more common means of financing a vehicle where you take out a loan from a financial institution, pay it back over an agreed period of time and own the vehicle at the end of the contract.


Down payment

A down payment is a once-off sum that is paid to secure your credit payment for your vehicle. Your down payment forms part of your deposit. No matter how you decide to buy your car, a down payment will always be involved. Even with private car sales for used cars or buying your car brand new off the floor, a deposit will be required and is normally 10% of the total cost of the vehicle.


Balloon payment

When you hear the term “balloon payment” floating around financing conversations be wary. At the end of your contract, there may be an outstanding amount that needs to be paid in full and that’s a balloon payment. Another term for a balloon payment is a “residual payment”, so keep an ear out for that as well.


Principal amount

The principal amount is both the total amount of the loan that needs to be repaid, as well as any outstanding amounts that are to be paid when the contract has ended.


Overall cost

The overall cost is the total sum of money that will be repaid at the end of the contract including the loan amount and any interest. Obviously, the amount will be more accurate at fixed interest rates where you can sum the different amounts and see what your total expense is for buying a car.

The importance of understanding these terms is so you don’t end up signing an agreement you can’t actually afford or get stuck in a contract with unforeseen expenses at the end of it. Know what you want out of your vehicle finance agreement, don’t be frazzled by the “fancy” terms, and make sure you’re happy at the end of it.‚Äč 

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