Don't use your bond for vehicle finance

“People are definitely feeling the pinch of interest rate hikes during 2007 and things are not going to get any easier. With an imminent fuel price increase on the cards and recent increases of some basic commodity prices, such as bread and milk we are advising people to tighten their belts and become more responsible in terms of their money and debt,” says AA Finance general manager Maria Ganhao.

“If you are considering buying a new car, furniture or any other assets and need finance for these purchases, you need to consider the long-term effects and not just your immediate affordability levels. You need to take into account a number of scenarios that might have an impact on you in the next 3-5 years, such as interest rates going up further, petrol price increases, rates and taxes increases and children going to school.”

Ganhao warned consumers against carelessly dipping into their bonds to finance new assets ‘cheaply'.

“Unless you can discipline yourself to paying the same amount per month into your bond for that asset as you would have paid on short-term finance – and not just the monthly minimum bond repayment – you will end up paying double for that particular asset.

“A further blow will be that in most cases you won't still own the car, furniture or anything else you financed through your bond when it is finally settled after 20 years or more,” he pointed out.

A R100,000 car-loan at 14.5% over 60 months means you pay a total of R141,170 over the five year period. But the same amount translates into a total of R307,200 over a traditional 20-year bond.

To illustrate the issue more clearly, monthly repayments on a car costing R100,000 and financed over 60 months at the current prime interest rate will amount to R2,353 monthly.

If you have a bond of R650,000 and you increase it to R750,000, the monthly repayments will increase from R8,320 per month to R9,600 per month. This might seem like a saving of R1,073, but in effect the car will cost you R166,030 more if you don't pay the additional amount into you bond for the next five years.

“Even if you are able to afford something today, you need to ensure that you can afford it tomorrow as well in case economic conditions change. Therefore you always need to have surplus funds after all your investments, policies and financial obligations have been met for the incremental increases in living costs,” concludes Ganhao.

AA Finance offers competitive rates for vehicle finance. For further information visit www.aafinance.co.za.