Car financing: This is how it works

6 August 2019

When it comes to buying a new car, one of the most important factors to consider is your car financing. Make sure you understand how it works before you sign on the dotted line.


When it comes to buying a new car, one of the most important factors to consider is your car financing. Remember, cars are not an investment, they depreciate quickly, so don’t be duped into buying more car than you can afford. 

If you’re choosing to buy a car with financing from the bank or another financial institute, make sure you understand how it works before you sign on the dotted line. 

How does car financing work?
Rather than save up for the full amount required to buy your new car, you can apply for car finance. Here, you make an initial down payment, and subsequent monthly instalments. Also, you get to own the car once you have finished your monthly installments.
Usually, there are two car financing options:
You can choose a payment plan that allows you to own the car after the end of the payment period (anywhere from 60 or 72 months). Alternatively, you can opt to reduce your monthly installment rate by making a balloon payment at the end of the finance period. Typically, you can offset this balloon payment fee by selling off the car. In the event that you cannot afford to pay the fee, you can sometimes refinance again by taking out a separate loan. Calculate this carefully beforehand, though – you might end up spending much more in the long run.
What is a balloon payment?
The balloon payment is basically the money that you still owe after the finance period has lapsed. When you choose a balloon payment, your monthly instalments will be lower but you will be required to pay out a lump sum at the end of the finance term. This payment can be significant, depending on how much and how long the finance agreement lasted for. Typically, banks will likely not finance a car after six years.
Is a Service Plan included in a finance agreement?
No, a Service Plan and a finance agreement are two separate things. The responsibility of maintenance rests on your shoulders. Most brand new cars have a service plan included in the purchase price. If you are purchasing a car that no longer has a Service Plan or Maintenance Plan, let MotorHappy help you source the best possible Service Plan for your budget and your needs.
Understand your budget before applying for car financing
Once you find an ideal car, figure out how much down payment and monthly installments you are willing to pay. Bargain as much as you can, there is always a better deal somewhere. Don’t ignore other expenses such as fuel, insurance and maintenance. This may sound like a no-brainer, but a lot of people only consider the cost of the car. Check for the best possible Maintenance Plan, Service Plan and Insurance through MotorHappy. Once we understand your needs, we will present you with a variety of options and advice to help you make an informed decision.

Once you get those sorted, you can now apply for a car finance. Below are some tips to help you get started:

• Check your credit score before applying for finance. Your credit rating goes a long way in defining the terms of the car finance.  A  negative credit score will either mean your application is rejected or you might pay higher interest.

• Approach a bank(s) to get your car financed. If you will be purchasing the car from a dealer, then they will most likely handle the financing process. If this is the case, you will need to come along with some valid documents such as your ID, last three-month bank statement, and a proof of your address.

• Once the bank gives you the green light, they will inform you of the initial deposit, monthly installment and applicable interest payment. Payment will usually be spread through a 12 to 72-month period. A smaller deposit will mean higher interest rates spread through a longer payment period. On the other hand, a shorter finance period means that you get to pay higher installments over a shorter period with reduced interest rates.

What happens if I want to settle my loan earlier than expected?
If for any reason you wish to pay off the entire loan earlier than agreed, you would have to get in contact with your bank for a settlement amount. The bank will calculate this amount based on the outstanding loan, and any other applicable/outstanding interest.


This article is intended to be used and must be used for informational purposes only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information in this article is strictly at your own risk. We will not be liable for any losses and/or damages in connection with the use of the information contained in this article.

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