What do you look for when you are buying a car? Don’t forget about financing!
We want to ask you two very simple questions. How much time do you spend analysing and comparing car features when you want to buy one? You will probably look into bodywork, engine capacity, power, wheel rims, design, standard features, extras, and so on; a thrilling world of possibilities that are, undoubtedly, important and exciting.
Here comes the second question. How much time do you spend analysing and comparing financing terms and conditions for your car? Probably much less, right? Though not as exciting as sports wheels, they are just as important, if not more, since they have a direct impact on your wallet.
If you buy a car in instalments, you should pay attention to these variables:
Initial deposit and amount to be financed: At the time you formalise the financing you will have to make an “initial deposit” and the amount to be financed will be the “retail price” (outright purchase), minus the deposit.
There may be one price for paying for the car outright (retail price) or another, lower, price if you apply for financing (“price subject to finance”), which could lead you to believe that “the car is less expensive if you finance it”). This is never the case! To find out the total price of the car if you finance it, add the following items: Initial deposit + arrangement fee and other charges + monthly payments + final payment
Deferral: This is the number of months over which you will pay off the loan, usually lasting three or four years. You need to assess whether this is suitable for you.
Arrangement fee and other charges, monthly payments and final payment: It is vital you familiarise yourself with these concepts. You will have to pay an “arrangement fee” at the start of the financing (together with the initial deposit), which is usually between 1% and 3% of the loan amount. You may also have other initial expenses, such as insurance. The “monthly payments” are the amounts you will have to pay every month over the life of the loan to repay principal and interest. The last payment to be made at the end of the deferral is called the “final payment” and will usually be for a much higher amount than the other monthly payments. Keep this in mind for financial planning purposes!
Total amount owed: This is the total amount you will have to pay for the financing (arrangement fee and other charges + monthly payments + final payment). Add the amount of the initial deposit to obtain the car’s total price if you apply for financing. Compare it with the retail price before deciding!
APR: this is the actual annual cost of the loan, expressed as a percentage. It allows you to compare different offers: the lower the APR, the lower the financing cost.
Therefore, if you are going to buy a car, consider the financing terms and conditions as carefully as you consider the car’s functionalities and features. You will enjoy it even more.