Purchasing your first car can be an exciting but overwhelming experience, especially regarding financing. Understanding how car financing works is key to making a smart decision. Here’s a simple guide to help you navigate the process.

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What is car financing?
Car financing means borrowing money to buy a car. You pay back this loan over time, usually with interest. The amount you pay each month depends on the loan amount, the interest rate, the deposit, and the loan term (how long you have to pay it back).

Types of financing options:

  • Loans from banks: These are traditional loans where you borrow and pay money back with interest. Shopping around can help you find the best rates.
  • Dealer financing: Many car dealerships offer financing options. While it can be convenient, make sure to compare their rates with other lenders.
  • Leasing: Instead of buying, you can lease a car. This means you pay to use the car for a set period (usually 2-3 years) and then return it. Monthly payments can be lower, but you won’t own the car at the end.

Understanding interest rates
Interest rates determine how much extra you’ll pay on top of the loan amount. A lower rate means lower monthly payments. Your credit score plays a big role in the rate you receive - better credit usually means a better rate.

The deposit
A deposit is the money you pay upfront. It reduces the total amount you need to borrow. A larger down payment can lower your monthly payments and the total interest paid over time. Aim for at least 10-20% of the car’s price.

Calculate your budget
Before applying for financing, figure out how much you can afford. A common rule is that your monthly car payment should not exceed 15% of your monthly take-home pay. This helps ensure you don’t stretch your budget too thin. Be careful to also not mistake qualifying for a specific loan amount and affording the repayments. 

Get pre-approved
Getting pre-approved for a loan gives you a clear idea of how much you can borrow and your interest rate. This can help you negotiate better when you visit a dealership.

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Read the fine print
Before signing any loan agreement, read all the terms carefully. Look for any fees, the total cost of the loan, and what happens if you miss a payment.

Buying a car is a big decision, but understanding financing can make it easier. With the right knowledge, you can drive away feeling confident about your purchase.

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