Buying a new or pre-owned car is a significant financial commitment, often in the form of an instalment sale contract that can span several years. While the allure of driving off in your dream car without making an upfront payment can be tempting, taking the time to save for a deposit can offer substantial long-term financial advantages.
Paying a deposit is not a relic of the past, but a good finance strategy that could positively impact your loan approval, reduce the interest you pay, and even shorten your loan term.
Paving the way for approval
Financial institutions are generally more inclined to approve vehicle finance applications that include a deposit. A deposit demonstrates a level of financial discipline and commitment from the buyer. It also reduces the lender’s risk as they are financing a smaller amount relative to the car’s value. By contributing a portion of the purchase price upfront, you present yourself as a lower-risk borrower, which can be a crucial factor in getting your finance application over the line, especially if your credit profile is not perfect.
Driving down interest costs
One of the most significant benefits of paying a deposit is its impact on the total interest paid over the term of the loan. When you pay a deposit, you borrow less money. Consequently, the interest charged by the financial institution is calculated on a smaller principal amount. This means that not only could your monthly instalments be lower, but the cumulative interest paid by the end of the loan term will also be considerably less. Over several years, these savings can add up to a substantial amount, freeing up funds for other financial goals.
The lower risk of the deal might also incline the lender to offer the loan at a reduced interest rate.
Lebo Gaoaketse, Head of Marketing and Communication at WesBank, advises consumers to consider their financial well-being throughout the vehicle ownership journey. “In the context of managing the long-term total cost of vehicle ownership, the easiest way to reach the breakeven point and potentially upgrade to a newer car sooner is to pay a healthy deposit up front. The bigger the deposit, the quicker the breakeven point is reached, where the car’s trade-in value matches or exceeds the outstanding loan amount.”
Impacting your loan term and monthly payments
A deposit also offers flexibility regarding your loan term. With a reduced loan amount, you might opt for a shorter repayment period. While this could mean slightly higher monthly instalments compared to a longer term on the same reduced amount, you’ll pay off the car faster and save even more on interest. Alternatively, if a lower monthly payment is your priority, a deposit will help achieve that, even with a standard loan term, making your vehicle more affordable on a month-to-month basis.
See the difference for yourself with WesBank’s Vehicle Finance Calculator
Understanding these benefits intellectually is one thing, but seeing the actual numbers can be a real eye-opener. WesBank provides a user-friendly online Vehicle Finance Calculator. Prospective car buyers can use this tool to input different vehicle prices, deposit amounts, interest rates, and loan terms. By adjusting the deposit amount, you can instantly see how it affects your estimated monthly instalments and the total cost of credit. This practical tool empowers consumers to make informed decisions and understand the tangible benefits a deposit can unlock.
“While saving for a deposit requires patience and discipline, the long-term financial rewards are undeniable. Not only can it ease the path to finance approval, and significantly reduce your interest and instalment obligations, saving up for a deposit also helps you adapt to the budgetary changes that come with paying for a car,” says Gaoaketse.
Gold Dahlia
Domestic inflation: The highest inflation rate ever recorded in South Africa was in January 1986, at 20.7%. Some of you may remember those bad days where each wag of P.W. Botha’s finger put an extra percentile to the inflation rate. That year the average inflation rate was 18.7%. During the 2008 financial crisis, South Africa’s inflation rate was 11.5%. In July 2018, the latest official monthly inflation rate was 5.1%. With inflation, this low, production cost increases can be expected to remain low, despite the large hikes in the petrol price. This reduces the perceived risk of starting a business in South Africa. Compared to Venezuela (200 000% inflation rate) we are not doing too badly!