However, Mike von Hone, CEO of TransUnion's Auto Information Solutions division, warns that while there are excellent deals to be had, consumers need to be fully aware of all the ramifications of the deal.
“For example, many deals utilise what's known as a ‘Balloon Payment' agreement. Some people also refer to this as ‘Residual Value' (RV) agreement but in fact, they are not the same,” he says.
Both RV and Balloon Payment finance agreements are similar in that the financial institution structures the financing package for a specific type of vehicle in such a way that only a portion of the total amount owed on the vehicle has to be paid over an agreed number of years, resulting in a lower monthly repayment.
The balance - the unfinanced portion - then becomes due at the end of the agreed finance period. This is the RV or the Balloon Payment portion.
The difference between an RV and a Balloon Payment contract relates to where the risk for the outstanding payment lies at the end of the finance agreement period.
In an RV agreement, the financial institution is responsible for the balance of the outstanding debt. The consumer can surrender the vehicle to the financial institution which then sells or auctions the vehicle in order to recover the outstanding amount. The consumer ends up without a car, but also without any debt - and is free to enter into another financing arrangement for another car.
Alternatively, the consumer usually has the option to keep the vehicle and pay the outstanding RV amount.
With a Balloon Payment agreement, the consumer is responsible for the final payment.
For most consumers, the ideal scenario would be to trade in the vehicle and use the money obtained to settle the outstanding Balloon Payment - and have enough left over to put down as a deposit on another vehicle.
“The risk, however, is that the trade or retail value of the vehicle at the end of the original finance agreement could be less than the outstanding amount owned to the financial institution. The good news is that most financial institutions will allow the consumer to enter into a new finance agreement to pay off the Balloon Payment,” von Hone says.
However, depending on the size of the Balloon Payment and the way in which the new contract is structured, the consumer could find himself paying off the vehicle for a few more years, by which time the trade-in value is likely to be considerably less.
What can consumers do to reduce their risk when buying a new car?
According to von Hone, consumers must look beyond the monthly repayment to evaluate the overall affordability of the vehicle.
“Always ask whether the financial agreement includes a Balloon Payment, how much this will be and, most importantly, who will be responsible for this payment - the consumer, the financial institution or, occasionally, the dealer,” he advises.
“Then determine whether the proposed Balloon Payment is realistic. Don't just accept - or hope - that the particular vehicle will be worth more than the Balloon Payment amount owing at the end of the contract period. Remember that some vehicles tend to retain their value better than others. Do some homework.”
While no-one can predict with certainty what the resale value of a new vehicle will be in three, four or five years time, it is possible to obtain an indication by looking at the historical performance of a particular make and model.
That information is available to consumers on the internet by logging on to www.myautoinfo.co.za and choosing the auto value option. Here one can purchase an auto value report for R25 which provides an estimated trade and retail price range for the particular year, make, model and variant of any vehicle that is older than one year.
“Armed with this information, a consumer could get an indication of whether the proposed Balloon Payment is a viable option, or a dream waiting to burst in a few years' time,” von Hone said.
