How to use lump sum payments to your advantage
Factoring a lump sum payment into the finance deal for your next car purchase can have some attractive benefits, but make sure those benefits are understood and put to good use.
Responsible budgeting is key to these payouts, so you’ll need to act sensibly during the term to maximize what they offer.
A lump sum payment allows a buyer to take an amount owed on the purchase price of a car and set it aside, which means monthly payment amounts are calculated on a lower value, making refunds more affordable.
You are essentially paying off a loan for most of the car, but not all of it.
The amount set aside at the start remains the responsibility of the buyer and will still have to be settled in the long term.
“There is a deep misunderstanding among consumers that a lump sum payment makes a car cheaper or allows them to drive a vehicle they simply cannot afford. However, this is not what a lump sum payment is designed for,” says Ghana Msibi, CEO of WesBank Motor Division.
“This type of payment is meant to help with cash flow management at the start of a finance deal, but only if you can afford it. It can help ease the burden of monthly expenses, but buyers with offers lump sums may need to use the money they have saved to settle the balance owing at the end of the term.
Depending on the balloon amount percentage, the money saved on monthly payments should more than cover the interest costs of a loan in order to refinance the lump sum of debt at the end of a balloon term.
In other words, it might be more prudent to save the money yourself by driving the financed vehicle than to apply for another bank loan to pay off the outstanding amount owed on the vehicle after years of driving.
Vehicle owners who enter into a lump sum payment agreement should familiarize themselves with the term “break even point”.
Break-even occurs when the trade-in value of the financed car matches the amount still owed to the bank.
When calculating the break-even point, it is important to include the amount outstanding in the balloon debt at the end of the loan period.
“The reason a break-even point is so important to understand is that South Africans tend to change or upgrade their vehicles more often than is financially viable,” Msibi continues.
“The break-even point for a vehicle financed with a lump sum payment is lower than it would be with a conventional installment agreement. If your break-even point is 36 months, but you just can’t resist a shiny new car after just two years, the amount owed on your first car will be added to the cost of the new deal.
“As such, you are still paying off part of your old car while driving your new one. Consumers who do this repeatedly could find themselves in financial difficulty if, for example, their income and financial situation changes, making the outstanding debt unmanageable.
This is a dangerous trap to fall into, and we strongly advise our customers to only consider switching cars once the respective break-even point has been reached.
This will help maintain the balance of monthly repayments, the value of their current car, and balloon debt. It is also important not to consider a lump sum payment as an alternative to an initial deposit.
A healthy deposit on a new or used car will always pay dividends further down the financial road, as it will not only advance your break-even point, but it will also reduce monthly repayment costs and deferred debt held in the balloon. .
“We always advise our WesBank customers to look beyond repayments when assessing what they can afford when buying a car. With vehicle ownership, a monthly installment is not not the bottom line, as other responsibilities including fuel, insurance, tires, regular maintenance and unrelated living expenses also need to be factored into affordability,” says Msibi.
“There’s a big difference between being able to afford a car and being able to afford to own it.” WesBank offers a range of useful tools and calculators designed to answer your car finance research questions.
The newly launched WesBank app lets you know how much you can expect for your current car, figure out which car you can afford, apply for vehicle financing and get approved in minutes, or calculate monthly payments on your dream car.
Source: West Bank