by Buying your dream car can sometimes be halted by loan payments and potential sky-high interest rates. Can you work out how much interest you will pay back?
First things first, as is the case with most loans, your financial risk to the lender will be assessed. This makes each interest rate personalised.
Your current risk profile is assessed in terms of your:
- Credit history and ability to pay back loans on time
- Current credit score
Did you know? A bank determines your interest rate, not the car dealership you are buying your car from.
What Happens When You Apply For a Loan At a Car Dealership?
Step One
You submit your application for a loan to your chosen dealership.
Step Two
The Finance and Insurance representative, at the dealership, submits your car finance application to all financial institutions.
Step Three
Your credit history and credit score are analysed to assess whether you are in a position to easily afford the monthly payments on a new car loan.
You may receive a lower interest rate if you are trading in your current vehicle and you have a clean credit record. This is because, with a bigger deposit, you are more likely to clear the remainder of the loan within the given period.
Step Four
Banks revert with their offers and proposed interest rates. You choose one that is manageable according to your budget.
If banks are not convinced you will be able to afford the monthly payments, you will not get the credit. There are, however, additional factors in your profile that may act in your favour.
Factors Contributing To a Stable Profile:
- Whether or not you own property
- If you have savings
- Your relationship status
This is due to the fact that, with the above assets involved, you are less of a financial risk and thus may receive a lower interest rate.
Should You Use a Balloon Payment When Financing a Car?
A balloon payment is the final payment you will owe on a loan and is usually a percentage of the total loan amount.
For example, if you buy a car for R160 000 with a 10% balloon payment, you will pay back the other 90% (R144 000) in the contract period and make the final (balloon payment) of R16 000 to complete the loan.
Problems may arise, when deciding to make use of a balloon payment, as it is significantly larger than previous monthly payments. This is sometimes hard for some to swing, as it may not fit into their budget. Most will end up selling the car or taking out another loan in order to finance the balloon payment.
