How vehicle finance houses work

							How vehicle finance houses work

All vehicle finance houses make their living by charging interest on the money we loan
to buy our gleaming examples ofart in motion. They determine an “interest rate" which
is a percentage ofthe price for the car. The interest rate is calculated by using the
“repo rate" — the rate at which banks borrow money from the Reserve Bank — and
adding a percentage. This percentage depends on your credit worthiness, which is
determined by the amount of risk you present to the bank.

This isn't rocket science - if you have no fixed assets, have had a judgement against
you for not paying debts and earn an average salary, then don't expect them to jump up
with glee when you want to borrow for a new car. “Prime rate" is the interest rate at
which they lend to a customer who is “good risk". Prime rate is the repo rate with a
percentage added by the bank to cover its costs and a margin of profit.

A “good risk" can get between one and two percent lower than the prime rate. But
always remember this is all open to negotiation with your finance house at the time
you apply for a loan. Ifyou are not happy about the rate offered; shop around. Time
waits for no man and neither does the interest rate. Generally, the longer the “loan
period", the more interest you will end up paying.