There are three main types of finance options available. The method you choose depends on what you qualify for.
If you do not use the car for the production of your income i.e. it is for mainly for private use you would choose an Instalment Sale. You must pay a deposit of 10% (if you can pay more it will reduce your repayments) and must pay it off in 54 months or less. You do not get any tax benefits on this type of financing, but if you are a business owner you can depreciate the vehicle at 20% per annum for 5 years. When your last instalment is paid, ownership of the vehicle passes to you.
In the past in order to qualify for a lease you had to use the car for the production of your income. People like this option because no up front deposit is required. Now anyone can get a lease provided they have a good credit rating. If you are self employed you can claim maintenance and running costs from the receiver. The Maximum period of a lease is 60 months. At the end of the lease you have the following options: You can take ownership but you will have to pay tax on the market value of the vehicle at that time. Or you can hand the vehicle back to the bank, but this is rarely done because the vehicle almost always has a value and is often used as a trade in against a new car.
Many business owners opt for a Residual lease or Balloon Payment lease. This means that they finance 60% of the car and pay the remaining 40% (these figures are negotiable) at the end of the lease. Although this reduces the monthly payment, it is the most expensive way to finance a car. The 40% residual value attracts interest charges over the entire period of the contract. If the business -person is not in the position to pay off the residual they have to finance it for a further period.
With the advent of the access bond, many people are using the equity in their homes to finance their vehicles. This is a cheaper form of financing, but be aware of the pitfalls. If you are not extremely disciplined you could end up paying for your car for ten years. If you use this option you must pay in the extra money religiously over a fixed period of time. The government is currently proposing a bill that will force lenders to institute a interest rate penalty to home owners whose bond exceeds 80% of the equity in their home, so the benefits may be lost.
Beware of adding too many extras to the amount to be financed, especially if the car is second hand. The bank may refuse to finance the vehicle, if it has to be sold early on in the contract the cost of the “bling” can not be recouped, spinners and Pink shag seat cvers are not every ones cup of tea..
If the car is over three years old the bank will be reluctant to finance it for the maximum period, so make sure that you can afford to finance the vehicle over 24 or 36 months.
Always check your invoice and contract, sometimes things may be have been added that you did not agree to. If the car is purchased from a private party, take it for an AA evaluation before you buy it (I think I have already said that).
Dealing with the Banks
Your credit history will play a part in the kind of interest rate you will be offered. If you have been a little slow at paying bills they will penalise you accordingly. Judgements for bad debt may disqualify you totally. However, if you have a good explanation as to why the judgement was awarded against you, (like the dentist extracted the wrong tooth so you did not pay him) tell the bank before they find out for themselves. This may win you some leniency.
Have your ducks in a row when you make the application. The more information you can give them the quicker the loan will be approved. So have the following documents available.
- Proof of income, 3-6 months worth of payslips or bank statements. If you have recently changed jobs it is a good idea to have a letter from a previous employer.
- A letter from your employer stating your salary and how long you have worked there.
- If you are a homeowner, a copy of the bond registration document and a recent statement.
- Provide the bank with a list of any other commitments you might have.
- Provide a list of other income and assets.\
- Tell the truth!
Even though it may seem cheaper to finance the car over a longer period you end up paying more interest. For example, at current rates, if you finance an R80,000 over 54 months it will cost R2080 per month, over 36 months it will cost you R2800.00. But the interest charges on the 36 month period will add up to R21,200 while over a 54 month period the interest will be R32,700.
The next thing to budget for is car insurance South Africa has one of the highest road accident rates in the world. The chances of having your car stolen are also greater here than just about anywhere else in the world. So driving around without motor car insurance could be one of your riskiest financial decisions.
When it comes to motor car insurance your broker should have three different types of policies to offer you. There’s comprehensive insurance, third party fire and theft, and third party only. Comprehensive insurance is the most extensive cover you can buy. It’ll protect you against, theft and accident. It will also pay for any damage that you cause to other cars. All insurance comes with some level of excess. The excess is the first few hundred or even thousand rands that you have to pay before the insurance company will pay anything. The good news is the bigger the excess you take, the lower your monthly premiums will be. But if you do choose to take bigger excess and something happens to your car, make sure you’ll be able to pay it. If you fancy yourself as the next Schumi, go with the lower excess. Be warned, the more you claim the higher your insurance will be, so its better to go easy on the throttle (you’ll save on petrol too!) One other important factor when buying a car, if you are 23 and you can afford to buy a supercharged M3 with NOS and a Bob Green conversion (or is it Rob?) your insurance premium will also be supercharged. Insurance companies see this risk in the same light as Mr Bean piloting a fully loaded jet fighter, blindfolded, drunk and with teddy on his lap. In fact, don’t even ask.
No matter what policy you get, there are always cases where the insurance company will refuse to pay your claim, if your car was found to be unroadworthy, if you were drinking alcohol, if you falsified your licence or you took your Uno to Kyalami and tried unsuccessfully to drift. All policies are different, so you must ask your broker to explain exactly what your policy covers and what it doesn’t.. Cheapest is never the best, the cheaper the policy the fewer the benefits so make sure you get the best cover for your needs.
Taking your time, finding out the facts and doing your homework will ensure that your car buying experience goes smoothly. As with all large purchases caution, research and a little restraint go a long way.