How does car finance work?

Whether you are a car fanatic who polishes your car every weekend or someone who just wants a reliable vehicle to get you from A to B. This article is for you!

As much as we can save, many of us cannot afford to pay cash for a car. While there is much debate about the best way to buy a car, financing a car is a common practice for many South Africans.

It is vital to talk through this decision with a financial professional as a car is a large commitment and often a long term one. Taking the time to ensure you can afford the car, its insurance, fuel, services and tires is vital! Failure to do this can lead to major issues down the road, so make sure you take the time to adequately plan!

Things You Need to Know

Car finance is confusing. There is a lot of fine print and fancy terms that can quickly make you feel lost when all you asked was what the cost was! As always, we are here to provide some information on some key terms used in car financing to help you understand!

Finance Term

The finance term is the term of the loan. This is how long you will be paying off the vehicle. The longer the term the lower the monthly repayment and the more interest you will pay over time. Usual car finance contracts will be over 60 months or 72 months. This is why you need to think carefully through this decision as it is a long-term commitment.

Balloon / Residual

A balloon or residual payment is delaying the payment of your car into one large payment at the end of the finance term. This can help lower your monthly repayment, but there is a downside. After the 60 or 72 months, you will need to pay the final residual amount. This means you need to ensure that you can afford this repayment. Calculate the residual amount and see if you are happy with paying that amount in one go!


The car instalment is the actual amount that you will pay every month. This amount is often taken in the form of a debit order and is paid for the full term. This amount can change slightly due to interest rate and fee changes. It is also important to check if the monthly service fees are included in the instalment.

A car is a useful asset to have and can allow you to commute, travel and create memories. This is a big decision and not rushing into it is vital! Take your time and make the right decision. If you are struggling to make the decision speak to a financial planner who can help you access the situation.