Financing your car through your bond? Beware the pitfalls

South Africa (SANEPR.com) July 3, 2008 -- 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, as Maria Ganhao, General Manager, AA Finance, warns, financing a car through your bond will only add to your woes.

“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 5-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.”

In a recent survey conducted by AA Finance, it was found that 25% of respondents finance their cars through their bonds.

Consider:
- Car finance for a new vehicle worth R100,000 at 15.5% 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, on a monthly basis, looking at its affordability over the next 3 to 5 years.

“Balloon or residual payments are only suggested for tax orientated persons, or people that 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 persons 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.

For further information, visit http://www.aafinance.co.za, or call 0861 0 AA FIN or 0861 022 346.

About AA Finance
AA Finance offers a range of flexible, competitive finance solutions for cars 8 years and younger and R40,000 or more, with the best possible lending rates depending on your personal credit profile. The company also offers voice recording of contracts to ensure convenience. AA Finance is an additional service offered by AA Autobay, the online portal for buying and selling private pre-owned cars.