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Surprised by car finance terms

Oct 20 2014 15:39

A Fin24 user did not realise that the interest rate on her car finance would change (it has already done so twice). She writes:

I am a 23-year-old female. Last year I bought a car without having to pay a deposit and with a balloon payment.

What I didn't realise when I bought the car was that the interest rate was linked and over the past 12 months my instalment has changed twice.

I spoke to the finance house and they said the terms of the contract cannot be changed.

Now I am trying to find out if I could pay the loan off as fast as possible before the instalment reaches a point where I cannot afford it anymore.

READ: Unable to continue car payments

The Wesbank Customer Care Team responds:

As a first-time car buyer it can often be confusing to understand all the banking terms.

We always advise that you try to put down the biggest deposit possible. This helps you to knock a big amount off the initial loan for your car.
Plus, if you pay a big or small deposit, the amount you pay the bank back is less and your interest rate can be lower.

As you say, your finance contract was structured using a linked interest rate and not a fixed rate.

The former will see your instalment change as the interest rate fluctuates, but a fixed rate remains stable for the duration of the contract.

We always advise that you check your contract agreement carefully before you sign the deal and ask the dealership’s finance and insurance adviser for any advice.

They are legally obligated to provide the correct advice and not anything that will benefit the dealership.

If you are still unsure about the difference between the two interest rates, feel free to watch this video to learn more.

Sadly, you are absolutely correct: Once the contract is signed you cannot change the terms of the agreement.

You can attempt to settle the debt sooner by making additional repayments, which will reduce the total loan amount and lower the total amount of interest paid.
If push comes to shove you may have to cut expenses to continue affording your vehicle repayments.
Another option is to find out if you can trade in your vehicle on one that will have a more affordable monthly instalment. However, this might be financially not viable. Your vehicle’s current trade-in value could be less than what a dealership might offer you.

Usually this break-even point – where your vehicle’s value is equal to its trade-in retail value – is reached after roughly 40 months.

It is a good idea to follow the business news to see whether the interest rate changes on November 18. As you have realised, changes in the interest rate will impact your repayments.

Thank you for asking for assistance.
We hope we have helped you to make better buying decisions today to improve your future loan agreements.

ALSO READ: Best way to approach vehicle finance

- Fin24

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wesbank  |  money  |  money clinic  |  debt  |  vehicle finance


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