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10 terms you need to know about Vehicle Finance and Insurance

Thinking about financing a new car? Or interested in switching to a new insurance policy?

Thinking about financing a new car? Or interested in switching to a new insurance policy?

The following will give you a much better understanding of all things vehicle finance and insurance related!

Vehicle Finance

Interest Rate

When purchasing a vehicle on credit – in addition to the stated retail price of the vehicle – you will also be paying back interest based on the value of the car.

The longer you take to pay off your car – the more interest you will accumulate over the duration, on top of the retail price of the car.

There are various interest and repayment rate calculators available online. I used FNB’s calculator, to do a quick example:

Let’s say I was purchasing a R100 000 vehicle, over a three year period (36 monthly repayments) and the interest rate was stated to be 10%. FNB’s calculator gives the following results:

Monthly repayment: R3,226.72 This amount multiplied by the total amount of monthly repayments: R3226.72 * 36 = R116,161

Total interest paid: R16,161.87 This combined with the the initial amount: R100,000 + R16,161 = R116,161

If I chose to pay the vehicle off over a five year period – the monthly payments would be less, but using this same example – the value of the total interest paid would be: R27,482.27.

Trade-In Value

If you are purchasing from a dealer who is interested in your current vehicle – they may offer you a “trade-in value”, which they will deduct from the cost of the new vehicle you wish to purchase. Generally considered a hassle free way of selling your current vehicle, while purchasing a new one.

However, using this knowledge – dealers will often offer you less than what your car is actually worth because of the convenience. If sold privately you would probably get a higher value for it, it all just depends on how much the hassle is worth to you.

Lease Agreement

Instead of purchasing a car you could opt to lease one. This means that you will make monthly payments for the vehicle, however at the end of the lease agreement you won’t own the car – the company you leased it from will still own it.

The monthly payments for a leased car will be less as a result and when the lease expires, you can sign up for another lease. This means you won’t have to worry about reselling your old car or trading anything in – you can simply sign a new lease for the most recent model of car that you want.

Down Payment

When purchasing a vehicle on credit, the down payment is the amount you are required to pay in at the beginning – lowering the amount of credit required.

Balloon Payment

A balloon payment is the lump sump amount that you will still owe, after completing the number of agreed upon repayments. Retailers will offer these kind of deals, to make vehicles more affordable.

However, the downside is that you will end up paying a lot more interest over all. Once completed with the monthly installments – you will then be required to either pay in the lump sum amount, or refinance that amount again.

Vehicle Insurance

Fault Claim/Non-fault Claim

A fault claim is an accident or loss where you are considered to be responsible, or if your insurance company is unable to recover the costs from anybody else.

A non-fault claim, is when you aren’t to blame and your insurer is able to recover the costs of the claim from someone else.

Third Party Only (TPO)

This is the lowest level of car insurance coverage required by law and will not cover any damage to your own vehicle. It will only cover the following:

  • Injuries to others.
  • Damage to other’s property.
  • Accidents caused by your passengers or a driver named on your policy.

Comprehensive Cover

This is the highest level of car insurance and generally covers:

  • Injuries to others.
  • Damage to other people’s property.
  • Accidents caused by your passengers or a driver named on your policy.
  • The use of a trailer, while connected to your vehicle.
  • Fire damage and theft.
  • Accidental damage to your own car.
  • Medical and hospital expenses, (up to the policy’s limit).
  • Any damage or loss to personal effects in the vehicle, (up to the policy’s limit).

Insurance Premium

This is simply the amount you pay per month for the insurance coverage.

Excess

Insurance policies will almost always include an amount that you are required to pay-in when making a claim.
The two main reasons for this are:

  1. to dissuade people from making minor/fraudulent claims
  2. to reduce your monthly premiums.

Generally speaking – the higher the amount of excess required by your policy, the lower your monthly payments will be.

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