Home loan not for cars

In South Africa's current economic climate — interest rate and petrol price hikes, rises in inflation and the basic cost of living increasing — consumers need to focus on managing their debt in order to stay financially sound.

Many consumers are making judgement errors when it comes to incurring debt and financing a car through your bond will only add to your woes.

Maria Ganhao, General Manager of AA Finance, warns: "Many people perceive car finance through their bonds as affordable credit. It is, however, the most expensive form of credit available due to the period of repayment. While the monthly repayments might be lower than on a traditional five year loan, the end result is a 200 percent repayment of the car's initial value, especially considering that a car depreciates in value over time. Nine times out of ten, you will not own the car anymore by the time the bond is paid off."

Ganhao notes that using 'cash' out of a bond to finance anything has a big effect on the overall repayment of your bond. "In our current tough economic conditions, you shouldn't load your bond unnecessarily as the value of your house could also change. As an example, your house may be worth less today than it was a year ago. If you want to sell your home, you may not be able to settle the bond, meaning you'll either make a loss or not be able to sell it at all."

AA Finance recently conducted a survey and found that 25 percent of respondents finance their cars through their bonds.

Consider the following:

  • Car finance for a new vehicle worth R100 000 at 15.5 percent over 60 months — the sum of your repayments totals R144 319
  • When the same car is financed through a bond — repayments over 20 years total R324 931.

With further increases in the prime lending rate expected this amount will, no doubt, increase.

The key to managing your debt, especially if you have to finance a car, is not to over-commit. Buy a car that you can comfortably afford including maintenance, insurance and fuel. Also look how its affordability is likely to change over the next three to five years.

"Balloon or residual payments are only suggested for tax orientated people or those who use their car for business purposes and qualify for certain tax relief from SARS. This should, however, be avoided if trying to bring affordability in line. Non tax orientated individuals should try to pay a deposit of 10 to 15 percent — this way there is a buffer between you and the settlement of the vehicle," concludes Ganhao.

Article from: www.iafrica.com