Car Finance Terms Every First Time Buyer Should Know
Understanding vehicle related terms will help you make better financial decisions when buying your first car. The Moov team is here to assist first-time car buyers with some key financial terms to get you on the move with peace of mind. How you choose to finance your vehicle can be the difference between a great ownership experience or an experience filled with headaches. This is why it’s extremely important to understand the following key vehicle finance terms:
This is an upfront payment that will reduce the total amount of money borrowed from the bank. In general, the larger the deposit you can pay upfront, the lower the total repayment cost and monthly instalments will be.
According to the South African Reserve Bank, an interest rate is the price for loanable funds borrowed for a period of time. Simply put, an interest rate is the price you pay for loaning money from a bank and is expressed as a percentage of the total loan amount. There are two types of interest rates you as a car buyer can choose.
Fixed Rate: An interest rate that will remain the same over the entire term the loan is paid back. Fixed interest rates are often higher than linked rates, the benefit is that you will have a predictable instalment over the term of your loan.
Linked Rate: As the name suggests, a linked interest rate is linked to the prime-lending rate set by the South African Reserve Bank. Whenever the prime lending rate increases, your monthly instalment will increase, if the prime lending rate decreases, your instalment will too. It is important to keep some room for these changes in your budget.
A balloon payment is a lump sum payment that must be made at the end of your finance term. Balloon payments generally exist as a way to reduce monthly instalments and are expressed as a percentage of the total price. Taking a balloon payment option means you either have to save up to make the lump sum payment at the end of the term, or sell the car and settle the balloon amount. Alternatively, you could take a new loan to pay off the balloon payment.
Your payment term is the time period you choose to pay off the loan. Currently, monthly increments can be anything from 12 to 84 months. Shortening the term would increase your monthly instalment and decrease your overall loan repayment amount, whereas increasing the payment term length would decrease your monthly repayment but increase your total loan repayment.
It’s always a good idea to use a vehicle instalment calculator to get an estimate of how much a vehicle can cost you every month. Remember that this serves as a guide and usually won’t include fees and any extras you’ve included in your purchase. Always leave room in your budget for insurance costs and in rate change fluctuations. We hope these terms will help make your buying experience easier to navigate. Happy car hunting!