SIMON BROWN: The best ways to buy your wheels

There are four ways to pay for a car, and three involve different debt structures.

The first is good old vehicle finance whereby you’ll pay over a set time frame, anything from four to seven years. The longer the term, the lower the monthly payments, but the higher the total interest bill. For every R100,000 of loan your total interest payment is about R30,000 over four years but R45,000 over seven years (this assumes a 13% interest rate). An extra 50% in interest with the shorter term would cost you about R2,800 per month, with the seven-year loan coming in around R2,100.

The next option is with a balloon payment. Here, a percentage of the loan is not paid off over the course of the repayment period. But you’re still charged interest on the amount and at the end of the period you will have to stump up a chunk of money to settle the debt. Staying with the above numbers, a 40% balloon payment over four years drops your monthly cost to about R2,100 but total interest rises to about R38,000 and you’ll still owe R40,000 at the end of the loan. At this point, you can trade the car in to pay off the remaining R40,000, but then you have to start this financing process all over again.

You can also refinance the balloon payment with a personal loan. If you did that over two years your monthly payments would remain about R2,100 and ultimately, you’ll pay off the car in six years (four years for the initial loan term and two years for the balloon payment).

I dislike these balloon payments because most people I know who’ve used them opted for the largest balloon and the longest term possible, and ended up taking more than a decade to pay off their new car. They’d all have been better served buying a smaller and cheaper car which they paid for over a shorter period.

The third option is leasing, a huge trend in the US but less so locally. Here you pay for the use of the vehicle with limitations, such as how much mileage you’ll do. Any excess mileage is then charged for and at the end of the lease term you simply hand back the car and start again. For those who like to upgrade their vehicle every few years this can work well, but be aware that this route means you are always paying for your vehicle.

The fourth and best is cash, but that’s not really an option for most, especially when starting out. But a good deposit upfront reduces your monthly payments and means you pay less interest.

The trick is that when the car is paid off, keep driving it for a few years and save the monthly payments so that when you replace it, you have a larger deposit. Eventually, after a few vehicles financed this way, you’ll have enough cash to pay for it upfront. It took me three cars — buying them using debt and keeping them for longer than the repayment period — before I was able to pay cash for my vehicle. And that was an awesome feeling.