While paying cash for a new car is the cheapest option in the long run, it is not available to most people, and choosing the correct payment plan can lead to a more stress-free experience while still getting you the car you desire.
MotorHappy, a supplier of motor management solutions and car insurance options, has provided an explanation of the three main methods one can use to finance a vehicle purchase.
“Buying a car is probably the second-most expensive purchase of your life, after a house. So, it’s important to choose the best financing option for your budget and lifestyle,” said Jarrod Merman, Managing Director at MotorHappy.
“As with any financial decision, if you opt to finance your car, it’s important to know what you’re signing up for.”
Instalment sale agreement
One of the most common ways that an individual can finance a car is through an instalment sales agreement.
An instalment plan lets you sign up for a pre-agreed interest rate and monthly payment amount for the duration of the instalment period, and these will not change if you opt for a fixed interest rate.
However, if you choose a variable interest rate, your monthly payments will increase or decrease depending on how and when the prime interest rate changes, according to MotorHappy.
The length of the agreement is also decided beforehand, and most contracts will range anywhere from 12 up to 72 months.
A shorter plan means you will finish paying off the car sooner, which has the added benefit of ultimately paying less in the form of interest, but will require paying a higher instalment each month.
Many instalment sales agreements also require a down payment at the start of the contract, and a higher deposit will help to lower what needs to be paid every month.
One more factor to consider is that instalment plans offer the choice of a balloon or residual payment, which is a lump sum that needs to be paid at the end of the agreed period.
While a balloon payment can lower your monthly premiums, it will require that you additionally save money in order to be able to pay the balloon sum at the end of the agreement.
It is possible to re-finance the balloon payment, but this can make the end cost of owning the car quite high, said MotorHappy.
Guaranteed buybacks
A guaranteed buyback (GBB) or guaranteed future value (GFV) plan is different to an instalment sales agreement in that it ensures the value of the vehicle by the end of the contract period.
To do so, certain criteria need to be met, which include the following:
- Start a new GFV contract with a new car
- Return the car to the dealership without entering a new contract for a new car
- Pay the remaining balance on the car
Once the remaining balance has been paid on the vehicle it becomes yours to own.
Lease or rent to own
An increasingly common option for many motorists is leasing a vehicle or renting to own one.
A lease is essentially a long-term renting plan that is set according to a pre-determined period and monthly payments, and the main benefit of this option is that it can often be cheaper than buying a car on an instalment plan.
Furthermore, it can allow for faster vehicle turnover, as a new contract with a new model can be opened as soon as the old one has ended.
The main downside of leasing, meanwhile, is that you don’t get to keep the car at the end of the payment cycle, and will either need to pay to purchase the vehicle or open a new contract with another model.
Keyword: Different ways you can finance a car