Most people don’t have enough cash saved up to buy a vehicle in cash. Financing can help you in drive away in a motor vehicle of your choice, even if you don’t have the funds to pay for it in full up front.

There are two types of vehicle finance: the most common one is an instalment sale agreement and the other is a lease agreement.These options are explained in more detail below.

If you are  not a South African citizen, you may be required to have a bank account with the financial institution and provide a copy of your passport.

Not many people know that you can also use your home access bond to finance the purchase of a motor vehicle. We’ve supplied details on this below.

You should start by preparing a monthly budget, which includes all your income and expenses. Include the additional motor vehicle running costs such as maintenance. insurance and fuel. You will then be in a position to assess how much you have left over to pay off a motor vehicle loan or lease.

The amount available to pay off a loan or pay the lease instalments, together with any deposit you are able to pay, will enable you to work out roughly the value of the motor vehicle you can afford.

Calculate this estimated value, right now by using the handy calculator on this site .

When using the calculator apply a conservative interest rate. Prime plus 2%-4% may be a good option. If you are fortunate enough to have a very good credit record and the bank considers you a low risk you may be able to obtain the prime rate or prime minus 0.25% The prime rate at Jan 2019 is 10.25%. 

The financial institutions will perform their own assessments and calculations, which is why their amount will probably differ from yours. Remember, you will also need enough money to pay the initial costs such as registration of the vehicle and other administration costs. 

Most financial institutions require a deposit. The higher the upfront deposit, the less you have to pay back to the lender (including less interest). A deposit effectively reduces the monthly payments and/or can make the loan period shorter.

The higher the balloon payment (once off payment at the end of the loan period) the higher the interest and the lower the monthly payments.

Motor vehicle financing normally ranges between one and six years. The shorter the financing period, the higher your monthly payments will be. The longer the period the lower the monthly instalments - however more interest will be paid in total.

There will be minimum and maximum amounts that you can borrow - the financial institutions will provide this information.

When you’re shopping for a car, you can approach financial institutions directly or indirectly through a dealership. Many dealerships have good relationships with financial institutions and can assist you with the process. 

Certain dealership  also offer finance-for example BMW. They may from time to time offer a very low interest rate when you apply for their finance agreement and agree to buy a particlar model of car. Instead of offering a discount on the vehcile they provide a "discount" on the financing cost.  

The process requires you to provide information to the financial institution which will likely include:

• Proof of Income /Employment details
• Proof of Identification
• Proof of Address
• Personal Budget
• The Motor Vehicle’s details
• Your Driver’s licence

When obtaining finance, you will enter into an agreement with the financial institution. The agreement is normally very detailed, and it is important that you read and understand it’s contents before signing it. Ask the financial institution to explain the contract to you especially the parts about the implications of not making payments on time.

Be careful not to ask many too many dealers to obtain quotes from various financial as your credit score could be negatively impacted by the number of the credit score requests.

The risk of loss or damage to the motor vehicle is yours, and not the financial institution’s. That’s why you have to maintain the motor vehicle and continue to renew the licence.

You’ll need the prior written approval of the financial intuition to do any of the below:

• Sell, rent out, abandon, transfer your right of use of the motor vehicle to any third party, or allow the motor vehicle to be possessed by any third party
• Take the motor vehicle out of the country
• Modify the motor vehicle

You may not allow anyone without a valid driver’s licence to drive the motor vehicle and you must ensure the motor vehicle is not used in any illegal activity.
The financial institution has the right to inspect the motor vehicle from time to time.
You are also obliged to take out comprehensive vehicle insurance when you enter into a finance agreement. The financial institution may wish to approve the insurance policy.

Should an accident occur, and the insurance policy does not cover the damage to the motor vehicle in full, you will have to pay the difference.

You may ask the financial institution to terminate the agreement early by requesting a settlement value which when paid would result in the termination of the agreement. The financial instition would normally consider this request only after six months from the agreement start date.

The settlement amount could be substantial, but would be less than total value of the outstanding payments to be made.

Two common types of interest rates include a fixed rate (which stays the same over the term on the agreement) and a variable rate, which is generally linked to the prime lending rate of South Africa.

If the variable rate is applied, then as the prime rate changes so will your interest rate. You will very often see interest rates quoted as “Prime plus/minus X%”.

You should get quotes from various financial institutions in order to obtain the best rate and always try to negotiate the best interest rate for yourself. 

If you believe the interest rates are likely to increase substantially over the loan/lease period you should consider a fixed interest rate.

Your personal credit risk score is an indicator of how much risk there is to a financial institution that you will not be able to pay your instalments. The scores range using a three digits system with lower scores indicating higher risk. When you apply for a loan to finance your motor vehicle, the interest rate you are offered will be impacted by this score.

A low score means that you are a higher risk debtor and the financial institution will likely charge a higher interest rate.

If you have an excellent credit score and the financial institution considers you a very low risk you may be able to receive a rate of prime or prime less 0.25%.

Your score depends on your credit history, so always try to maintain a healthy credit record in order to be granted lower interest rates when financing vehicles, property or other ventures. You can do this by making sure to always pay your all your bills on time and never missing loan or other payments. Examples include store accounts or phone contracts.

It’s a good idea to keep an eye on your credit score. You can check your score for free once a year through a number of online services, such as TransUnion.

For more information on credit scores please look out for an  article to be provided shortly, regarding credit scores, under the debt management topic

Below is a simple table showing the monthly payments that you would pay for the same loan but with varying interest rates. The amounts are based on a R200 000 loan paid back monthly over 5 years.

Interest Rate                   6%        8%        10%        12%       14%       16%
Monthly Payment R    3 866   4 055    4 249     4 448    4 653     4 863

Using the above example, if you were able to obtain a loan at 10% as opposed to 12%. The saving over the 5 years would amount to R11 940.

However you look at it, a good option is to negotiate the best interest rate possible and pay your vehicle off as fast as you can.

Visit our calculator section on this website to access a handy monthly payments calculator.

An instalments sale agreement is a very common method of financing a vehicle. In a nutshell, the financial institution agrees to buy a motor vehicle and then allows you to use it. Much like a loan, it involves paying for the motor vehicle in monthly instalments to the financial institution for a certain period, at the end of which the motor vehicle will be yours.

Often, you will have the option to pay an initial deposit at the time of purchase and/or a balloon payment at the end of the period. A balloon payment (also know as a residual value) is simply a final large payment that is made at the end of the contract period.

The financial institution will guide you as to the process to be followed and what documents they require when they consider the loan. It is very important to understand the terms of the instalments sale agreement.

Visit our calculator section on this website to access a handy monthly payments calculator.

When purchasing a motor vehicle through an instalment sale agreement, you as the buyer are registered as the vehicle’s owner on the motor vehicle registration documents, while the financial institution or financing institution is the title holder of the vehicle.
Financial institutions will often require a deposit to be paid at the time of purchasing the vehicle. This is paid in cash and is typically 10% or more of the vehicle’s value. There may be situations where the financial institution will agree to a 0% deposit agreement, but this will lead to higher monthly instalments and you having to pay more interest in the long run. If you are looking to become debt-free, this is not a good way to go.

The financial institutions will request all the relevant information from the buyer and seller and once they have approved the purchase of the motor vehicle they will pay the seller directly, which is normally via an electronic transfer.

Once the paperwork is finalised and the purchase price is paid, you will be able to take delivery and drive into the sunset with your new vehicle.

However, you will only become the title holder (take ownership) once you have made the final payment. Until then, the vehicle remains the property of the financial institution.

Much like a rental agreement, a lease agreement involves paying a monthly instalment to the financial institution for a certain period, at the end of which the motor vehicle will have to be return to the financial institution, as they still own the vehicle.

However, at the end of the lease term the financial institutions normally allow you (if requested) to either purchase the vehicle at an agreed price (which could be agree to at the start of the lease) or to enter into a new lease.

Financial institutions may choose to not buy and then lease to you any motor vehicle that is older than a certain number of years or has travelled more than a certain number of kilometres.

You may also be required to pay a deposit at the time of entering into the lease agreement. There may be situations where the financial institution will agree to no deposit, but this will lead to higher monthly lease payments and you having to pay more interest (which is built into the lease payment).

The financial institution will guide you as to the process to be followed and what documents they require when they consider the lease application. It is important to understand the terms of lease agreement and know what you’re signing up for!

Lease Agreements - good or bad idea?

On the upside, lease instalments are typically lower than the instalment sale agreement as you are not obtaining ownership of the motor vehicle at the end of the lease. The financial institution will, when calculating the lease instalment, take into consideration the expected value of the motor vehicle at the end of the lease term.

On the downside, there may be a number of additional costs to consider with a lease agreement. The financial intuition will likely charge an addition fee at the end of the lease term if  you travel more than an agreed distance. This  millage is agreed to when you enter into the lease.  This could be costly and must be motor vehicle fully considered. In additional when you return the motor vehicle at the end of the lease term any damage over and above normal wear and tear will also need to be paid for.

An access bond is a facility whereby you can make additional payments towards your home loan and then later withdraw that additional money.

If you have been making additional payments into an access bond, you will be able to withdraw up to the value of those payments and use it to pay for a vehicle.

Since home loans typically have lower interest rates than other short-term loans, it can be a good decision to finance a motor vehicle using your home loan access bond facility. After all, your home loan interest rate is probably lower than the motor vehicle loan/lease interest rates being offered to you!

If you withdraw the value required from the access bond and “pay it back” by making additional payments into your access bond over the same period you would have paid off the motor vehicle using an instalment sale agreement, you will end up paying less interest in total.

Other advantages include:
• Lower administration costs, as there are no/limited additional administration costs when utilising the access bond facility.
• Insurance savings, as you may choose to not comprehensively insure the vehicle but rather choose a cheaper option
• There is also a time saving as you don’t have to manage another loan (instalment sale) agreement.
• You can sell the motor vehicle at any time without having to go through the administrative processes required when entering into a separate financing agreement.
• You can also pay more into the access bond as and when required - to effectively pay off the “motor vehicle portion of the loan” quicker.

Visit our calculator section on this website to access a handy monthly payments calculator.