Linked or fixed credit rate – which is best when buying a car? A very important question to ask yourself before you sign any papers as you could find yourself unable to pay for your vehicle should you not understand what the difference between the two is.
Firstly, a linked interest rate is linked to the prime lending rate. The prime lending rate is subject to fluctuations and therefore should you purchase a car on credit with a linked interest rate, there is no guarantee that you will pay the same amount each month on your instalment. Should you however purchase a vehicle on finance with a fixed interest rate, you will usually pay a higher amount than if you had taken a linked interest rate. However the benefit to this is that you will have the same instalment amount each month which you will be required to pay back. It is also important to note that this amount cannot change during the duration of the loan period.
One of the ways in which consumers today and save money on their monthly instalments is by deferring a percentage of the purchase price until the end of an instalment sale or lease agreement. Although this may seem like a good idea in terms of your monthly cash flow, you may find yourself in trouble at the end of the lease period and have to pay back that lump sum on the vehicle. What is more is that people generally think that by doing it this way, they will not have to pay as much on interest, this however is not the case. Therefore if you can afford to pay a higher monthly instalment, then I would recommend that over taking out a balloon payment.
The majority of banks allow you to choose between the two rate options. Nedbank claim that the linked rate option is best for individuals and car allowance users. The reason for this is that they will get the benefit decreased interest rates should the interest rate decrease during the time of their payment agreement. However, should the interest rate increase, you will be forced to pay higher amounts on your vehicle. With regards to the fixed interest option, Nedbank claim that this is linked to the prime lending rate and therefore in the event that the interest rate does increase during the agreement period, your repayments will not be affected and your interest rates will stay the same. Nedbank claim that this interest option is best suited for individuals as it allows them to budget appropriately and will protect you against negative cash flow implications.
Nearly all of the banks in South Africa allow you to choose between a fixed or a variable interest rate which therefore means that you can choose the option that works with your cash flow. If you have a lot of disposable income and are willing to take the risks associated with a linked interest rate then this may be the best option for you.
Therefore if the interest rate drops in the market, then your instalment for that month will drop. If the interest rate increases then you will have to pay an increased amount on your instalment. Should you however not have this freedom with regards to your budget, then the best option for you would be a fixed interest rate. This means that you can budget a certain amount to be paid in instalments each month and that amount would fluctuate. The only downfall to this is that if the interest rate drops drastically then you will not be able to reap the rewards.