Buying a car on finance? Check these 5 numbers before you sign

A car is often the second-biggest purchase most Namibians make, after a home. Yet many of us agree to the deal based on one figure: the monthly instalment. That figure is easy to make look attractive by stretching the term or adding a balloon payment. These five numbers tell you much more.

1. The total you will pay

Multiply the instalment by the number of months, then add the deposit and any balloon. That is what the car really costs you. Compare it to the cash price. The difference is the price of borrowing.

2. The interest rate, and what it is linked to

Vehicle finance rates are usually quoted relative to the prime lending rate, for example "prime plus 2%". When the Bank of Namibia moves the repo rate, prime moves too, and so does your instalment. Budget for a rate rise, not just today's rate.

3. The term

A 72-month term makes the instalment smaller, but you pay interest for longer and may owe more than the car is worth for years. Shorter terms cost more per month and much less in total.

4. The balloon payment

A balloon (or residual) is a lump sum you owe at the end of the term. It lowers your monthly instalment today, but you will need that cash later, or you will have to refinance it. Ask yourself honestly: where will that money come from in five years?

A balloon does not make a car cheaper. It moves part of the price to the future and charges you interest on it until then.

5. The instalment as a share of your take-home pay

A common guideline is to keep your car instalment at or below about a fifth of your take-home pay. Remember that the instalment is not the full cost of the car. Insurance, fuel, services and tyres come on top.

Before you visit the dealer

• Know your take-home pay and your current monthly debt repayments.
• Decide your maximum instalment at home, not in the showroom.
• Get a quote from more than one bank if you can, and compare the total payable, not only the rate.
• Read every add-on (extended warranties, service plans, insurance) and ask whether it is optional.