THE end of the year can be an opportune time to buy a vehicle — the prices are likely to rise in the new year and you might score a great deal. But it may pay you to leave that car with the dealership until the new year so that you don’t suffer a double whammy in depreciation and resale value.
“The value of a vehicle starts to depreciate from the moment you drive it off the dealer’s floor,” said Glenn Stead, head of personal markets for vehicle and asset finance at Standard Bank.
“It must be registered in your name for you to take delivery, and depreciation is calculated from the date of registration. This means if you register the vehicle in January 2013 instead of December 2012, you gain a year’s worth of resale value. That’s a substantial gain.”
He said although the self-discipline to leave the car with the dealer until 2013 will be beneficial for buyers of new cars, it doesn’t work the same way with used cars.
“Depreciation is calculated on a monthly basis from the date of registration by the original owner. By registering the car in your own name in January, you will save yourself only around 2% in depreciation value for the month of December.”
In effect, then, you may only gain the advantage of beating the January sales price rise.
When it comes to financing the vehicle, Stead said a contract option often offered to buyers is a buy now, pay later arrangement, giving the buyer several months’ leeway before payments begin.
“Buying now but starting to pay only in April or May next year actually costs you a lot of money thanks to interest on interest accruing during that payment holiday period.
“The payment period for a loan is usually flexible, and that affects the amount of interest paid. In a payment plan, however, the interest is calculated up front on the full purchase price.
It is then divided over the contract term. From the outset, you are liable for all the interest and the whole capital amount for the entire duration,” he added.
“In other words, if you skip four months of payments in a 60-month contract, those payments will simply be added back into the payment plan. Your repayments for the remaining 56 months increase and instead of saving money, you end up paying considerably more on a monthly basis,” said Stead.
It is usually possible to ask for a scheduled payment holiday to be built into your contract, to cover periods you expect to be difficult, like every January. But this will have to be built into the contract from the beginning.
“That could be a time when school fees and other payments cut into your budget. However, don’t expect your financier to allow you to do this at short notice — you’ll need to write it into the contract in order for it not to cost you more. If you want to take a payment holiday on short notice, you can expect to pay more for missing a month’s payment - again because interest will accrue on top of interest.”
In the opposite scenario, vehicle finance contracts do not operate like mortgage bonds — you can’t make extra payments on a car without notifying your bank or finance house. “Our systems are not set up to recognise extra money that you might choose to pay into the contract on an ad hoc basis throughout the year. That money will simply sit in a suspense account and not be deducted from your contract.”
However, if you negotiate such payments, the bank is willing to be flexible. “You can get your bank to agree to a negotiated extra payment, which will then form part of the contract. We regularly rework payments, reduce payment periods or amounts or allow the payment of the balance,” he said.
One important thing to note is whether you will have a balloon payment or residual built into your contract, usually to lower the initial monthly instalments. The details to note are how much you’ll be expected to pay and when.
“It is easy to forget such details and then a big debit order can surprise you — it could even leave you with an impaired credit record. So, consider selling the car or respreading the payments over a further period in a new contract, but don’t wait until you are in trouble before you make the arrangement,” said Stead.
Ten top tips for buying a car
TIPS from WesBank’s executive head of sales and marketing, Chris de Kock:
• Always buy from a reputable dealership. You will be assured of the best possible service and this will help to safeguard you from buying a “lemon”;
• Make sure it’s fit for your purpose. Pay attention to the average mileage you travel per month, the car’s fuel efficiency, petrol versus diesel, and the ever-escalating cost of fuel;
• Don’t base your affordability calculation only on the repayment instalment. For an entry-level car, this accounts for less than 50% of the total cost of ownership. Budget for fuel, maintenance and insurance;
• A used car appears cheaper than the comparable new car but over the long term the cost of maintaining a used car will add up. In contrast, most new cars come with maintenance or service plans;
• When interest rates are low, most customers opt for a fixed interest rate, which sets the rate for the duration of the contract. When rates are high, most customers opt for linked interest rates — meaning that the interest repaid every month will be linked to the prime rate, in the hope that this will drop over the duration of the contract;
• Choosing a longer repayment period reduces the monthly instalment and this may initially appear attractive, but it accrues more interest;
• Paying a deposit has multiple benefits: it results in a smaller monthly instalment and allows you to finance the car over a shorter period. This means you can trade the car in sooner;
• A balloon payment is an inflated final instalment that is agreed up front. Oddly enough, customers sometimes tend to forget about this inflated amount at the end of the contract; and
• Consider carefully which value-added products to add to your finance agreement. When buying a used car, you should always consider a service or maintenance plan. There are also various personal insurance products such as life, disability and unemployment cover. A finance and insurance specialist will help you make the most informed decision.
* This article was first published in Sunday Times: Money & Careers