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Popping the balloon

2017-05-22 06:00

Many South African motorists are caught in a difficult situation – between the reality of needing a car to get to work and the worrying state of the economy as a result of declining growth and sovereign credit downgrades. An unstable economy will inevitably make people worry about the future direction of the cost of credit, the security of their jobs and the squeeze on disposable income as inflationary concerns bite.

This series of factors has hit the new car market quite badly, with sales in April plummeting 13.4% month-on-month and a whopping 25.5% year-on-year. And yet, of course, people still need to get around, so this drives people into the used car market, which itself has seen notable inflation as a result.

Declining sales are obviously a great motivation for manufacturers and dealers to look at their margins and to create deals to shift stock and there are some genuinely great offers out there, as well as “trade-in assistance” on used cars, which basically subsidises the trade-in to make a new car more affordable.

However, it’s important to be careful and to understand what you’re reading. There are many “offers” out there that are advertised as a monthly repayment (“get a new [insert car brand here] for just R2999 a month”, for example). These deals often seem like amazing value, and most likelysuch finance deals are structured with what’s known as a balloon payment, which means a hefty chunk of the capital still needs to be repaid when the loan term runs out.

This does a couple of things. First, it keeps the initial monthly repayments down, as you are in fact only financing a percentage of the car’s actual price. At the end of the loan arrangement you can either enter into a further, expensive credit arrangement to settle the balloon amount, or you can trade the car in for a new one. In reality this means you never actually own the cars you buy and sign up for several more years of expensive debt. It also tends to tie you into one particular car brand.

Balloon payments are an expensive way to finance a car, as is any debt held over longer periods. And while the low monthly payments might be a tempting way to get you behind the wheel of a car, taking on more debt in an environment where there is pressure on household incomes and in which interest rates might rise – depending on what happens to the currency and to the economy – may not be a wise or good idea.

For many people it would be better to opt for a cheaper brand or model – or to try to get rid of whatever debt you might incur buying a new car as soon as possible by avoiding deals with balloon payments. Saving for a car – or any costly “dream” purchase - is however your best possible option. Instead of paying interest on a negative balance, you receive interest and returns on that investment, which can itself be re-invested.

Saving also needn’t be difficult and choosing an investment amount that suits your income and lifestyle needn’t be complicated.  Sanlam’s www.smartinvest.co.za quickly and easily works out how much you need to invest to reach your dream. It's as easy as a few clicks online. 

Having a hefty deposit for a car not only keeps the capital cost of buying a new car down, it also reduces the cost of any debt you need to take on to make up the balance. And it could help you negotiate an even better price on the dealership floor. It really is the smarter alternative to expensive, rolling debt.

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