Does the 96 month car finance make sense?

During these difficult economic times, one is constantly looking at saving when paying their monthly expenses which also includes your vehicle instalment. In some cases you find that when one pays low instalments, there is usually a catch. Recently banks introduced a 96 month payment term which was an answer to people having issues with refinancing their balloon payment after a 72 month initial finance. When your 72 month term expires and your car was financed using a residual finance, the customer then needs to finance or pay the Balloon payment before you can then fully own the vehicle. If you then have a situation where your credit status is bad, you can NO LONGER be able to get finance for the balloon payment which then puts you in a very unfortunate situation where you either need to return the vehicle to the Bank or make a loan (remember your record is bad so umashonisa is your best hope……Good Luck with that). Now back to the 96 term car finance, here are the good and bad of this form of finance term:

Pros of 96 month term finance

• No need to refinance vs Balloon Amount on Residual Finance: With a Residual finance, you have to refinance the Balloon payment at the end of the initial term. If you take the 96 term, you no longer need to refinance any portion of the finance deal. You pay the same instalment till the end of term i.e. 96 months, and you then own the vehicle.

• Lower instalments per month – With the 96 term, you pay lower instalments compared to a person who pays a shorter term insurance. The longer the finance period, the lower the instalments. See table below with comparison.

• You can get a higher spec vehicle – Since you are now able to pay lower instalments, some people take advantage and try and get a higher spec car when compared to the one they initially wanted.

Cons of 96 month term finance

• Model of car financed: With the normal term finance i.e. up to 72 months, you can finance a much wider variety of vehicle models (age of vehicles) HOWEVER with the 96 month term, you can only finance vehicles NOT OLDER than 2 years. This means only new and demo cars are likely to get this finance approved.

• Higher interest rates and costs – As the longer the term of the finance term, the higher the OVERALL interest paid at the end of the finance term. The longer the finance term, Banks get more interest allocated on the deal (see table comparison below).

• Trade shortfall – When you drive our of a showroom, your prized vehicle loses value of between 10% to 25% depending on model. At the same time, your Finance loan is higher as there is now interest added on the purchase amount. When you then want to trade in your vehicle, there is now a gap between the amount wanted by the bank (settlement amount) and the value of the vehicle (book/trade in value) and this is called a shortfall. With the longer finance term, your monthly instalment at the beginning of the term is more allocated towards your interest than your owed capital amount. This means over the first 18 months or so, your owed capital amount decreases very slowly. This makes trying to trade in your vehicle at this stage quite difficult as the trade shortfall is higher. This is lessened when one pays deposit or buys a vehicle that holds its value or the condition of the vehicle is well maintained.

• Can you survive 8 years – Even though the cars sold today are of higher quality compared to older model vehicles, one has to consider the 8 year term vs the possible condition of the vehicle. Also considering the likely shortfall which will prevent one from trading the vehicle, would you survive a vehicle that has mechanical issues over part of the 8 year term. There is also the issue of job loses that are happening in the country and the tough economic times. Is 8 years a period that can allow you to take a risk with a loan amount.

As mentioned above, the interest is the big downfall of the long term finance whilst the instalments are lower. Below is a table made to show the difference on a vehicle finance amount of R450,000 for a new car at 11 percent interest rate (Prime +3). We have made the table to compare 5 types of Finance term ranging from 4 years to 8 years.:

Viewed from the above examples, its obvious the longer the finance term, the higher the interest (on the overall term) paid by the time the vehicle is paid up.