Advertisements and promotions promise attractive offers such as 0% interest or cash back after paying three months of your new car instalment, which is tempting at first but can have consequences in the near future.
Debt tricks lead consumers into deeper debt
According to Wikus Olivier, debt counsellor at DebtSafe, several consumers who request debt counselling have experienced some or other debt trick which has lead them deeper into debt.
Consumers often donâ??t stop to look at the fine print on the agreement they sign or ask the bank why the interest rate is so low. Most of the time when banks offer you a low interest rate or discount on your initial payment, you will end up with higher instalments or paying back your loan for a longer period of time.
Olivier explains some of the common debt tricks when purchasing a new car to look out for.
Lower interest rates than the current rates
We often see this with car dealerships that have regular specials where for example, if you purchase a car in the month of June you will receive only 2% interest rate on your payments.
The banks will not provide these interest rates without receiving something in return and therefore often the original price of the car is higher than what it is actually worth. When you decide in two yearsâ?? time to trade the car in at another dealer you will find you will not receive the money you expect to get back.
Only pay in six months
Another trick often used by car dealers is the opportunity to drive your new car for the first six months for free. All this actually means is that your payments following the six months will be higher due to the interest from the â??freeâ?? six months being added to the outstanding balance.
Zero deposit, or low instalments
The advert in the car magazine states â??no deposit and low premiumsâ??. This is a very tempting offer. However, after the five-year payment deal comes to an end and you are due to pay your final instalment, you will receive an invoice for a lump sum to make up for the discounted rate over the past 60 months. This leaves you in a situation where you think you are almost debt free but actually the debt has just begun.
Interest rates go up but instalments donâ??t increase
Should the interest rates go up, instalments on your loan will more than likely increase. However, to avoid this you can either increase the term of the loan by adding a few more payments – for example, paying back the loan on your car over 52 months instead of 50 – or increase your interest rates right from the start to guarantee that instalments remain unchanged.
â??These debt tricks might sound a bit scary but you canâ??t avoid them if you donâ??t know about them. The best way to avoid these tricks is to put down the maximum deposit possible and aim for the shortest repayment plan,â? concludes Olivier.