Understanding vehicle finance

Learn the ins and outs of vehicle financing.

What you need to do

Do your research

Have a clear idea of the type of motor vehicle you want and what you can afford to buy before you enter into a deal. Before applying for vehicle finance, ask yourself the following questions:

What do you expect from your vehicle?
Do you want air conditioning, power steering, ABS brakes, etc. - or can you live without it?
Should your vehicle be a basic passenger sedan or some kind of utility vehicle, station wagon or bakkie, etc? What will you need to transport?
Where can you find and purchase your ideal vehicle?
Do you want a new or used vehicle?

Keep in mind when you apply for vehicle finance that sometimes you get better value for your money by buying a used vehicle. Previously owned vehicles are cheaper because they have already depreciated in value. However, new vehicles usually come with a manufacturers' warranty and may offer limited risk in terms of accident damage or mechanical breakdown and can have a longer life span.

Financial considerations

In an environment of rising interest rates fuelled by overheating inflation, the cost of living has gone up rather dramatically and somewhat surprisingly. The most important points to think about when deciding to finance a new or used vehicle are as follows:

Always leave a buffer on your disposable income once you have taken your car payments into account, don't use every single cent on expenses, you may need extra cash should interest rates increase.
Take fuel costs, maintenance, security (e.g. Tracker) as well as insurance payments into account when setting aside a portion of your budget for car payments, call these motoring costs.
Keeping a clean credit record requires diligence in paying your creditors on time as well as budget discipline, but this will help ensure that you get a favourable rate of interest when applying for vehicle finance, thus minimising your repayments and saving you money.
At the first sign of trouble (i.e. risk that you may not be able to pay certain of your creditors) do not hesitate to contact your creditors to inform them about your situation, and secondly to see if they cannot offer you any relief or advice.
It may be possible to reschedule your contracts with certain institutions as well as restructure the terms of the contract. The period of finance can be extended up to 72 with the new National Credit Act; other institutions may allow you to put on a Balloon Payment if it makes sense for both you and the bank if you haven't done so already.

How big a deposit should you put down? In terms of the National Credit Act, you do not need to pay a minimum cash deposit on any vehicle purchased. However it makes sense to save for a deposit, as your monthly repayments will be a lot less. Your deposit can either be in cash or as a vehicle trade-in. The size of your deposit and the length of the repayment period are at the discretion of the bank and are related to the risks involved. A general rule is that the older the vehicle the bigger the deposit and the shorter the repayment term.

Legal implications

Minors (anyone below the age of 18) cannot legally enter into a contract to buy a motor vehicle or secure instalment credit for the purchase of a motor vehicle. As the buyer, you have the legal right to receive a vehicle free of any hidden defects - but only if you purchase your vehicle through an approved dealer.

Your responsibilities:

To pay the deposit and the remaining instalment
To take delivery of your vehicle on the agreed date
To take good care of the vehicle until the final instalment on your credit agreement has been paid
To keep your vehicle insured for the duration of the contract

If you default on your repayments, the finance company has the right to:

Sue you for the arrears
Cancel the sale agreement
Repossess the vehicle
Claim damages from you

Making monthly payments

There are two principal ways of paying for the vehicle you have purchased. You can sign a bank debit order so that the repayments are automatically deducted from your bank account and paid over to the vehicle financier every month. You can also pay in cash or electronically by handing over or transferring the money to the institution that has financed your vehicle every month. A debit order is the preferred payment option.

Insurance options

Should you comprehensively insure the vehicle you purchase? Any vehicle that is being financed through a finance company must be comprehensively insured. Failure to properly insure could result in financial disaster for the purchaser. Remember that one non-payment of an insurance premium can result in the policy lapsing.

The signing of a surety: If you are a first time buyer, you may need assistance in obtaining credit from a bank for the first time. The financial institution may ask that a blood relative stand surety on the financial transaction to enable you to qualify for credit. A parent makes the ideal surety on a financial transaction. Remember that, if the surety offered is acceptable to the bank and you fail to meet your obligations, the financial institution concerned can hold the person who signed surety responsible for the debt. However, even if a surety is signed, the financial institution is still responsible for ensuring that you have the ability to service the debt.

Finance options

There are two main types of vehicle finance packages available - Instalment Sale agreements and Lease Sale agreements.

With an Instalment Sale Agreement the vehicle is purchased from the dealer, or private seller. You drive the vehicle, but the bank owns the vehicle until you have finished paying it off. You make monthly repayments to the bank for a specified amount over a specified period, after which, when your final instalment has been paid, you take full ownership of the vehicle. The interest rate applicable on an Instalment Sale Agreement can be of either a fixed or a variable nature and the upper limit of interest that can be charged by a bank is governed by an Act of Parliament (the National Credit Act).

A Lease Sale agreement allows you to lease a vehicle from the financier with the option to buy the vehicle at the end of the agreement. The main advantage of this type of agreement is that you enjoy the use of the vehicle without outright ownership and the lease payments may be tax deductible. This type of agreement would suit people who are more tax orientated or self-employed.

It's always advisable to shop around before you make your final decision - especially if you have a vehicle to trade in on your purchase. The price dealers offer for trade-ins can vary considerably depending on their stock levels and ability to sell on your traded in vehicle.

Guidelines for private vehicle purchasing

The most important points to think about when deciding to finance a new or used vehicle are as follows:

Always leave a buffer on your disposable income once you have taken your car payments into account, don't use every single cent on expenses, you may need extra cash should interest rates increase.
Take fuel costs, maintenance, security (e.g. Tracker) as well as insurance payments into account when setting aside a portion of your budget for car payments, call these motoring costs.
Keeping a clean credit record requires diligence in paying your creditors on time as well as budget discipline, but this will help ensure that you get a favourable rate of interest when applying for vehicle finance, thus minimising your repayments and saving you money.
At the first sign of trouble (i.e. risk that you may not be able to pay certain of your creditors) do not hesitate to contact your creditors to inform them about your situation, and secondly to see if they cannot offer you any relief or advice.
It may be possible to reschedule your contracts with certain institutions as well as restructure the terms of the contract. The period of finance can be extended up to 72 with the new National Credit Act; other institutions may allow you to put on a Balloon Payment if it makes sense for both you and the bank if you haven't done so already.

If at all possible, always insist that the vehicle you are purchasing comes with a warranty. Reputable and "authorised" dealers will back up their sale by offering a warranty of some kind. Because their reputations and their relationships with the banks that finance the vehicles they sell are important to them, they generally keep their end of the bargain when it comes to latent defects on a vehicle. They also provide you with additional services such as vehicle licensing, a vehicle condition report, roadworthy certificate, vehicle finance and insurance, etc.

Which agreement should you choose

There are two main types of vehicle finance packages available. Learn about Instalment Sale Agreements and Lease Agreements to find the right option for you.

Choosing your agreement

Instalment Sale Agreement

What an Instalment Sale Agreement offers: Periods ranging from 12 to 72 months. Interest that is calculated at either fixed or prime-linked rates. Please note that the goods must be fully insured during the agreement.

What does an Instalment Sale Agreement entail?

Ownership of the goods when you have paid the full amount
If the asset is used for business purposes, you may claim depreciation and the yearly interest paid against tax
You enjoy the benefit of any resale value
Deposits are payable depending upon current legislation
The goods must be fully insured during the agreement

Is there a way to lower my monthly instalments? Yes, if you decide on adding a Balloon Payment to your overall repayment amount, your monthly instalments can be reduced. A Balloon Payment is effectively a way to postpone a portion of your payment until the end of your Instalment Sale Agreement. Once you reach this point, you need to pay a lump sum before the vehicle officially becomes yours.

You may want to consider taking the following option with your finance package: Take-A-Break Payment.

My available insurance/warranty options are:

Comprehensive Insurance covers vehicle to protect the customer and FNB
CoverPlus is shortfall insurance which covers the difference that is owed to FNB and the insurance payout
Customer Protection Plan (CPP) covers the outstanding balance in the event of death or permanent disability
Vehicle Warranty covers for mechanical breakdown after the manufacturer's warranty expires
Retrenchment Policy pays up to 9 monthly instalments when you are involuntarily retrenched and remain unemployed
Deposit Protector pays back your deposit if the vehicle is stolen or written off
Courtesy Car Policy (CPP) pays for the use of a courtesy car for 21 days if your car is stolen, written off or damaged

Lease Agreement

This option is best if:

You want to fix the cost of maintenance
You need to use expensive items, like motor vehicles, but you don't necessarily want to buy them
The vehicles used in your business depreciate rapidly and need regular replacement

What a Lease Agreement offers: Leasing provides the use of an item for an agreed period, during which time a rental is paid. At the end of the term, the goods can either be returned, you can acquire ownership or extend the lease. Periods range from 12 to 72 months. Interest is calculated at either fixed or prime-linked rates. The goods must be fully insured during the agreement.

What this allows me to do (primarily if the item is being used for business, or in the generation of income):

Repayments can be claimed as an expense against tax
You don't need to own the asset to use it
You avoid tying up working capital
Stepped payments, balloon payments and other structures can be tailored to your needs
You can arrange to take ownership of the asset
If you do take ownership, you may benefit from the asset's resale value

You may want to consider taking the following option with your finance package: Take-A-Break Payment.

Is there a way to lower my monthly instalments? Yes, if you choose to go for the Residual Value option, we will lower your vehicle instalments, with the Residual Value payable at the end of the lease. In short a Residual can be described as the amount you can purchase the car for at the end of your lease, should you choose to keep it. When you buy a car via Lease Agreement, you only pay for the portion of the car's total value that you actually use. The remainder of the value, at the end of the agreement, makes up the Residual.

Available insurance/warranty options:

Comprehensive Insurance covers vehicle to protect the customer and FNB
CoverPlus is shortfall insurance which covers the difference that is owed to FNB and the insurance payout
Customer Protection Plan (CPP) covers the outstanding balance in the event of death or permanent disability
Vehicle Warranty covers for mechanical breakdown after the manufacturer's warranty expires
Retrenchment Policy pays up to 9 monthly instalments when you are involuntarily retrenched and remain unemployed
Deposit Protector pays back your deposit if the vehicle is stolen or written off
Courtesy Car Policy (CPP) pays for the use of a courtesy car for 21 days if your car is stolen, written off or damaged