How to finance and insure a second-hand vehicle

Buying a second-hand vehicle may suit your budget better than acquiring a new one. But what impact does an older model have on vehicle finance and car insurance?

Justmoney reached out to specialists in the field to explain what the financial implications are of pursuing a second-hand vehicle rather than a brand new alternative.

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Are insurance premiums higher?

According to Nunben Dixon, head of Gumtree Autos, a number of variables affect the price of your monthly insurance premium – the make, model, and age of your car is a factor, but your risk profile as a driver also has an impact on the cost.

“The more expensive the car, the higher the cost of insurance. Rare, imported, classic, or performance cars, with limited representation, will be expensive to repair and thus more expensive to insure. Similarly, some pre-owned cars are often the target of criminals, which can also push your premiums up. Your age, driving history and other factors can also impact insurance,” says Dixon.

Wynand van Vuuren, client experience partner at King Price, points out that in most circumstances the value of a vehicle will decrease monthly. Therefore, the premium must also decrease according to the depreciation on the motor vehicle.

“A second-hand vehicle is worth less than a new vehicle and, therefore, the premium will be cheaper. As a result, you’ll save on your short-term insurance if you buy a second-hand vehicle,” says Van Vuuren.

Can you finance a second-hand vehicle?

Dixon explains that second-hand cars are outselling new cars in South Africa at a ratio of 2:1, which means there’s a growing trend to opt for second-hand vehicles.

READ MORE: Second-hand vehicles are growing in popularity.

He says you can absolutely finance a second-hand car, depending on its value and age. Some finance companies won’t finance a vehicle older than 10 years; others won’t finance a vehicle older than twenty. Some specify that they won’t finance a vehicle valued at under R40,000.

“It’s no different to buying a new car online but any financing comes with interest, making it more expensive than buying a vehicle in cash. Older cars in particular might also carry a higher interest rate,” says Dixon.

He points out that the original owner of a second-hand vehicle has taken the big depreciation hit on the value of the car already, so you’ll save a lot of money upfront.

According to Tayla Snowball, financial planner and healthcare consultant at BDO, it’s worth a mention that the cost of a used car is significantly lower than a new one. So, if you’re a buyer with cash available, you may prefer to purchase the vehicle outright and avoid financing as you’ll get a better deal.

She explains that there are some downsides to financing a second-hand car:

1. Higher overall cost: You tend to pay more to finance a car than to purchase it outright. After all financing means you’re taking out a loan, and loans attract interest. The interest on the loan tends to add up and makes financing more expensive than a cash purchase. That being said, second-hand cars are much cheaper than new cars as the previous owner has absorbed some of the depreciation, which means lower financing costs.
2. Less leverage: When financing, you may lose negotiating leverage. You might be lucky and get a deal here and there, but normally you get what the dealer offers. Cash payments are attractive to dealerships, because dealers know they’ll get immediate profits with less paperwork – so they might be willing to offer a cash-buyer a better deal to secure the sale.
3. You don’t actually own the car: This might come as a surprise to some, but when financing your vehicle, you don’t actually own it until the car is paid off. Until then, the lender holds the title and can repossess your car if payments aren’t made. When financing you also need to have insurance, because if the car is written off, the issuing lender will still expect to receive the full amount owing on the car, which could leave you in a dire financial situation.

Should you get a balloon payment?

Jason Apple, certified financial planner at Chartered Wealth Solutions, says that there are no specific cons for a second-hand vehicle versus a new vehicle other than the new vehicle will likely require a higher finance amount.

“The important consideration when financing any vehicle is the terms of the finance agreement. Taking a balloon payment option for any vehicle is not a great option and this is worse for vehicles that don’t hold their resale value,” says Apple.

He explains that this is because most people rely on the trade-in value of their car to settle the balloon payment and there is a big risk that at the end of the finance term this resale value is below expectation.

“Second-hand vehicles are sold at a premium by dealerships so locking in a balloon settlement on those values is not a great idea. A balloon payment reduces the monthly instalment but at the end of the finance term, you still owe a large sum of money in order to take ownership,” says Apple.

To find out which vehicle finance option is right for you, fill out the form on this page.