Get Financed today!
Sounds simple but there are other issues that you need to consider before you head off to the dealerships to find your dream car, caravan, boat, bicycle or whatever mode of transport you have in mind. Do your homework and come prepared to stand the best chance of securing vehicle finance with affordable monthly instalments and a better interest rate.
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Which is better? Buy or lease a vehicle?
The main benefit of buying a vehicle as opposed to leasing it is you own the vehicle at the end of the finance term. You’re also not restricted as to how and when you can use it. The downside of buying a vehicle is mainly depreciation, where the value of the vehicle drops almost as soon as it’s driven it off the dealership floor.
In addition, you have the hassle of selling the vehicle when you want a new one and you’re responsible for the maintenance and insurance. And let’s not forget FOMO (fear of missing out) when a new model comes out and you’re stuck with the old one under a long-term financing option.
For this reason, the full maintenance lease (FML) model is becoming more trendy as South Africans become more financially savvy. With FML, you rent the vehicle for a monthly fee and for an agreed period of time. Your monthly fee covers all maintenance costs, including services. At the end of the FML term, you hand the vehicle back and as long as you’ve stuck to the leasing agreement, you get a new one.
Leasing tends to be more popular among buyers who like to change their vehicles often without being penalised financially. In addition, leasing means there is no hassle involved in selling the vehicle, the instalments tend to be more affordable and there is no residual risk.
However, the downside to leasing a vehicle is you don’t own it after making all those monthly payments. In addition, people are often severely penalised for (a) terminating the leasing contract before its time is up and (b) exceeding the maximum number of kilometres allowed in the lease agreement.
What is vehicle finance?
Vehicle finance is a specialised loan that you get from either a bank, dealership or a vehicle finance company that allows you to pay off a new or pre-owned vehicle in monthly instalments over a certain period of time. It’s a common option for people who do not have the means to pay a once-off cash amount for a vehicle.
Vehicle finance is different to vehicle leasing. With the former, you own the vehicle outright once you have paid off the loan in full. With a lease, you do not pay off a loan and you do not own the vehicle at any stage. In effect, you pay money to borrow the vehicle for a specific period of time. We offer inhouse vehicle finance at the lowest prime rate.
What is the best way to finance a new or pre-owned vehicle?
You have the option of financing a new or pre-owned vehicle through a bank or a dealership. The application process is the same; your choice really depends on your situation. Finance through a financial institution is what they call a ‘direct loan’. Finance through a dealership is where the dealer collects information from you and forwards that information to one or more recognised auto lenders.
The main difference between financing a vehicle through a bank or a dealership is the salesperson at a dealership typically does all the work for you. The other big difference is finance through a dealership is usually more expensive.
Finance through a financial institution
Financing a vehicle through a bank generally requires you to obtain pre-approval for the loan where the bank provides you with a quote and a letter of commitment that you take to the dealership. With this in hand, you look for a vehicle within your affordability range. This way you avoid the disappointment of finding the vehicle of your dreams and then being turned down for finance at the vehicle’s price tag.
The vehicle finance interest rate offered by a bank is known as the ‘true interest rate’ as it doesn’t include a markup. The interest rate may differ depending on whether the vehicle is new or pre-owned. Some banks apply limits to a vehicle’s age and mileage, where new vehicles generally qualify for a lower interest rate.
Finance through a dealership
Once you have selected the vehicle you’d like to buy, the dealer fills in a credit application that it forwards to a select list of approved auto lenders. The dealer typically negotiates the best vehicle finance interest rate for you and takes the difference as compensation for handling the finance application. This is the markup on the interest rate we spoke of earlier.
The large dealerships in South Africa often provide in-house financing; offering a “buy here, finance here” promotion. These deals are often targeted at potential buyers who have a poor credit score or may even be blacklisted. The vehicle finance interest rate and deposit is usually higher than what you’d get from a bank but it’s often the only option for people in these circumstances.
Another financing promotion you’ll see offered by dealerships on brand-new models is “rates as low as 0% APR” to those that qualify (APR means Annual Percentage Rate). 0% APR means you don’t pay interest for a specified period of time, usually between 12 and 21 months. Once the 0% APR period runs out, the regular APR kicks in.
A 0% APR is a massive cost saving designed to boost vehicle sales because it means the buyer doesn’t pay interest charges during the promotion period. It only lasts as long as the buyer adheres to the strict terms and conditions of the agreement; a late payment can cancel out the 0% APR promotion.
Which is best? Bank or vehicle dealership?
Ultimately, the best vehicle finance option is the one that will cost less over the finance term. Vehicle finance interest rates offered by banks are lower than those offered by dealerships because they don’t include a markup.
It’s best to approach a bank for a pre-approved loan before going to a dealership. If you’re turned down for vehicle finance through the banks, the dealership deal may be your only option. The interest rate will be higher but it can work in your favour if you get a promotional deal that allows you to “buy now and pay interest later”.
Who qualifies for vehicle finance?
To qualify for vehicle finance in South Africa, you need to be:
- 18 years and older
- permanently employed in a salaried position (able to prove you earn a fixed monthly income)
- a South African citizen or permanent resident
- have a valid South African driver’s license with no endorsements
- have a good credit score
How does vehicle finance work?
You may choose to approach a bank or vehicle finance company for pre-approved vehicle finance and then choose a vehicle based on what you can afford which is determined by how much finance you qualify for; or you might find a vehicle you wish to buy and then approach a financial institution(s) to finance it.
Either way, the process to secure vehicle finance with a monthly instalment agreement typically follows these simple steps:
Credit card check
To start with, the bank will run a credit check on you. To get vehicle finance, you need to be 18 years and older and have a good credit record. You can do this yourself beforehand by confirming your credit score with the credit bureau in South Africa. There are a number of online sites you can use for a free credit score.
Calculate how much you can afford
The bank will do this or you can do it yourself before applying for vehicle finance. Basically, it involves working out how much you can afford to pay on a monthly instalment after your expenses. You can use an online vehicle finance calculator to reach a ballpark figure before you even start the process of looking for a vehicle or approaching a bank. Calculate your new car or a second-hand vehicle.
Apply for vehicle finance
You need certain documents to apply for vehicle finance such as a valid driver’s license and proof of address, as well as documents to prove how much income you earn a month (pay slips or bank statements). Before you start the application process, you need to gather the relevant documents that you’ll need to submit.
The leading financial institutions in South Africa that offer vehicle finance have a facility on their websites where you can apply online for a new or pre-owned vehicle; or for that matter, a motorbike, campervan, caravan, boat or microlight.
You can also apply for vehicle finance through the dealership where you have found the vehicle you want to buy. Business vehicle finance is usually dealt with by the bank’s commercial division.
Structure your vehicle finance plan
Once you have applied and been approved for vehicle finance, you will receive a provisional contract from the institution (or institutions if you have gone for competitive quotes). This is the finance agreement that sets out the details of your vehicle loan; including how much you will pay each month, over what period of time and at what interest rate.
Thanks to the existence of the National Credit Act (NCA) in South Africa, you are entitled to structure a vehicle finance contract to give yourself the best chance of honouring your financial commitments. In other words, you can choose the length of the contract term, the type of interest you want, whether you will pay a deposit or not and whether or not you’ll use the balloon payment option.
A finance term is typically between 12 and 72 months; shorter terms have higher monthly instalments, while longer terms have a lower monthly payment. The interest rate is either fixed or linked.
Take out a protection plan
It is generally a prerequisite of vehicle finance approval that the borrower takes out a vehicle loan protection insurance policy that covers the debt on the vehicle in the event of his/her death, disability, onset of a dreaded disease or retrenchment.
In other words, should anything happen that prevents you from meeting your monthly instalment commitments and paying off your debt to the bank; the vehicle finance protection plan will cover the outstanding balance. This protects not only the bank but your loved ones who may be left with the burden of inheriting your debt.
Take out vehicle insurance
The lender providing you with vehicle finance will insist on proof that you have taken out insurance on the vehicle you purchase. Remember, the vehicle belongs to the lender until such time as you have paid off your loan in full. You can use your own insurance company or take out vehicle insurance through the lender.
Comprehensive insurance is somewhat compulsory for any vehicle owner in South Africa. Your insurance premium covers you for the risk of an accident, theft and hijacking. In the case of vehicle finance, if your vehicle is written off in an accident, stolen or hijacked; the insurance company will cover the outstanding amount on your loan. This means you are not paying off vehicle finance for a vehicle that is no longer in your possession.
Which South African banks offer vehicle asset finance?
It’s estimated that more than 50% of all vehicle purchases in South Africa are financed through banks via specialised finance divisions. Large corporates in South Africa tend to use lines of credit for business vehicle finance when funding is required.
The four leading financial institutions in South Africa that dominate market share in vehicle finance are: (in alphabetical order)
- ABSA Vehicle and Asset Finance Division, a division of ABSA Bank
- NedCredit, a division of Nedbank
- Stannic, a division of Standard Bank
- WesBank, a division of First Rand Bank
What are the benefits of pre-approved vehicle finance?
Obtaining pre-approved vehicle finance means you have found a lender (bank or auto lender) that is willing to finance a new or pre-owned vehicle to a value that you can afford. In other words, you find out how much you can spend on a vehicle before going to the dealerships. It helps you stay within your budget and often gives you negotiating power because you are a pre-approved buyer.
Pre-approved vehicle finance has many benefits. You only shop for a vehicle within your budget which saves you time and disappointment; you know up front what your monthly instalment will be and can then budget for other costs such as a maintenance plan, insurance and policy protection; and you know what interest rate will be charged on the vehicle finance.
More importantly, pre-approved vehicle finance removes the anxiety associated with sourcing finance after you’ve found the vehicle you want to buy. You avoid discovering problems with your credit score after the time you’ve spent searching for a vehicle and gives you time to resolve any issues that will block your chance of buying a vehicle.
What documents are required for vehicle finance?
To apply for vehicle finance through a reputable financial institution, you require the following documents:
- a copy of your valid South African identity document/card
- copy of the front and back of your South African driver’s license
- proof of income, not older than 3 months
- proof of residence, not older than 3 months
Salaried individuals need to produce pay slips for the last 3 months. People who earn commission must produce their pay slips for the last 3 months as well as the latest 3 months’ stamped bank statement. Internet banking statements are not accepted.
How is the monthly vehicle finance instalment calculated?
Your monthly instalment is calculated on the purchase price of the vehicle, minus whatever deposit you paid to secure the vehicle finance. The finance term ranges from 12 to 72 months. The longer the finance term, the lower the monthly payment.
A lower monthly payment may be a more affordable option in the short term but bear in mind, interest charged on the loan adds up over a longer finance period and the total amount paid on the vehicle at the end of the day increases proportionally.
Using a motor vehicle finance calculator
Before you look for a new or pre-owned vehicle or even approach a financial institution for vehicle finance, you need to find out how much you can afford to pay each month on a monthly instalment. For this you can use a motor vehicle finance calculator that determines the deposit you can afford to pay, and the maximum payment you can afford after subtracting your monthly expenses from your monthly income after taxes.
It’s a simple calculation that subtracts your monthly expenses from your monthly income and savings. Monthly expenses include rent or home loan payments, utilities, food and household costs, transport, policies and insurance, clothing, entertainment, school or university fees, landline or mobile costs, credit card payments, store account payments, loan payments and any other regular monthly expense.
You’ll find a finance calculator on the websites of the leading banks and vehicle finance companies. They are easy to use and give you a good idea of the monthly instalment you will pay as long as you put in accurate information. Remember, the figure you get from a vehicle finance calculator is an estimate of potential monthly payments and is not an offer from the bank.
Why is a deposit required for vehicle finance?
The deposit required to secure vehicle finance goes against the vehicle purchase price. The higher the deposit amount paid, the lower the monthly instalment. In other words, by paying a large deposit, you borrow less money from the bank and therefore pay less over the finance term in total interest.
If you don’t have the financial means to pay the required deposit, you can opt for the monthly instalment with a balloon payment.
Motor vehicle finance with a balloon payment
The balloon payment option on motor vehicle finance is where a portion of the purchase price is set aside in order to reduce the monthly repayment as the instalment is calculated on a lower amount. The balloon payment is also known as the residual value.
A balloon payment is similar to a deposit except it’s paid at the end of the finance term, rather than at the beginning. It might appear to be an attractive option, particularly if you don’t have money upfront to pay a larger deposit; however, the large debt owed at the end of the finance term can come as a nasty surprise, particularly if you have not planned properly for it. Often, if someone can’t come up with the outstanding portion on the vehicle loan, he or she has to re-finance that chunk of money.
Vehicle finance interest rates
Financial institutions make money by charging people interest on money they borrow. You borrow a certain amount a money for a period of time and pay a fee on top of your monthly instalment for the privilege of borrowing that amount from the bank or auto finance company. The longer you take to pay back a loan, the more interest you will pay. One can also refinance your car.
The South African Reserve Bank (SARB) sets the interest rate in this country. Their role is to keep the South African economy stable by raising and lowering the interest rates. Raising interest rates has the effect of slowing down spending and lowering interest rates stimulates spending.
The SARB uses an economic tool called the Repo Rate to manage the economic growth and stability of the country. The Repo Rate is the interest rate that commercial banks pay to borrow money from the SARB.
The Repro Rate drives the Prime Interest Rate which is the figure all financial institutions use as a starting point to negotiate interest rates with its customers.
A customer that is deemed financially reliable and risk-free will be able to negotiate an interest rate that is at the current Prime Rate or slightly lower (Prime less 1%).
A customer that’s considered high risk or has not proven his/her credit worthiness is normally offered an interest rate above the current Prime Rate (Prime plus 2%). The risk of this person defaulting on a vehicle finance agreement is greater and therefore the financial institution charges a premium to cover its risk.
What are the different types of interest rates?
There are two types of interest rates available to consumers for vehicle finance: fixed and linked rate. Interest is the additional amount you pay to the lender for the privilege of loaning the value of the purchase price of the vehicle. The extra cost you pay is usually calculated as a percentage of the amount of money you borrow.
Fixed interest rate
A fixed interest rate is as it sounds; it’s an inflexible rate that is linked to a line of credit and cannot be changed. It’s generally slightly higher than a linked rate but the benefit is it remains the same for the duration of the loan. The benefit of a fixed interest rate is you know exactly how much you have to pay in interest each month and there are no nasty surprises if there is a sudden change in the prime rate.
Linked interest rate
A linked interest rate is linked to the prime (base) lending rate of South Africa. The prime rate is the interest rate that commercial banks charge their favourite customers; in other words, their most creditworthy corporate customers. Variable interest rates are quoted as a percentage above or below prime rate.
Your vehicle finance agreement is quoted to you as ‘Prime plus a percentage’; for example, Prime plus 1% or 2%. Or it could be Prime minus 1% if you are a highly favourable customer.
If the prime rate decreases, your monthly vehicle instalment also decreases. However, if the prime rate increases, your monthly instalment will increase.
How are interest rates calculated?
The interest rate quoted on vehicle finance is expressed as a percentage of the loan amount, which is referred to as the ‘capital amount’. It is calculated using the Repo Rate which is the rate at which banks borrow money from the South African Reserve Bank. The banks add a markup/percentage onto the Repo Rate to arrive at a borrowing rate for a customer. The percentage added depends on a customers credit worthiness; in other words, the degree of risk the bank associates with the customer.
- Good risk: someone who has fixed assets such as a house and has a good credit record (no problems lodged with the credit bureau for missed payments, judgements etc.). These customers are typically offered a lower interest rate on loans.
- Bad risk: someone with no assets or has a poor credit score or judgement against them. These customers are typically offered a higher interest rate on loans.
What is the current interest rate in South Africa?
The average interest rate in South Africa for the period 1998 to 2019 is 12.46 percent. It reached an all-time high of 23.99 percent in June 1998 and a record low of 5 percent in July 2012.
In July 2019, Fin24 reported that the South African Reserve Bank’s monetary policy committee cut the benchmark repo rate by 25 basis points to 6.5% from 6.75%; noting that it is the first time since March 2018 that the benchmark interest rate has been cut.
Fin24 explains the repo rate is the benchmark interest rate at which the SA Reserve Bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the lowest rate at which banks start lending to clients. With the repo rate down, the prime lending rate would decline to 10% from 10.25%.
Paying off your vehicle finance early
The sooner you pay off your motor vehicle finance, the better. Most lenders offer a 72-month repayment plan which means the repayment amount is low. However, as with most loans, the longer you take to pay off your debt; the more interest is charged and the more expensive the vehicle becomes over an extended period of time.
According to the National Credit Act, you have the right to increase your monthly instalment and pay off the vehicle finance over a shorter period of time than was initially stated in the finance agreement. You can even pay off your vehicle loan in a lump sum without paying a penalty fee.
How does private vehicle finance works?
Private vehicle finance is where a financial institution or auto lender is willing to finance a vehicle bought through a private deal, as opposed through a dealership. Financial institutions recognise the value in buying a pre-owned vehicle because the vehicle has already depreciated and the previous owner has incurred the upfront costs.
Bank-financed private deals are subject to certain conditions because the banks do not want you to buy a ‘dud’; where the vehicle has a serious fault and you could end up unable to fix it and unable to pay back the loan. The bank is then saddled with a bad asset if it has to repossess the vehicle and has little chance of recovering its losses. These restrictions are as much for your protection as they are for the banks.
The banks will stipulate a minimum income requirement (usually at least R6 000 a month before tax), and you need a clean credit report. If the vehicle is older than 10 years or has a high mileage, the bank requires it to be inspected by a bank-approved testing station. For the vehicle to change ownership, it must pass a roadworthy test.
The final condition set by banks is the private deal must meet the compliance requirements of a vehicle title clearance service provider such as TitleGuard. They underwrite the risk aspect; check that the seller is the legitimate owner of the vehicle and whether there is an outstanding loan owing on the vehicle; and carries out an insurance assessment which would reveal if the vehicle has been in any major or undisclosed accidents and whether the vehicle has been rebuilt. Enquire about refinancing your car.
The private finance deal will not be authorised if the check reveals a latent defect.
Vehicle finance for self-employed individuals
People who are formerly employed, take home a regular salary and have a good credit score find it easier to access credit. Being self-employed where your monthly income is not fixed makes it a bit harder but not impossible as long as you can prove how much income you generate (from different sources) and have a good credit score.
Additional supporting documents are required and the verification process takes slightly longer so it’s important to keep a good record of your income and be well-prepared to facilitate the process. Financial institutions offering vehicle finance also reserve the right to ask for assessed tax returns for both the business and the applicant
In summary, financial institutions require the following to prove you can service a loan over a number of years:
- Self-employed: two years of signed-off bank statements with year-on-year comparable figures
- Freelancers: six months’ remittance advice and bank statements
- Commission earners: six months’ remittance advice and bank statements
Remittance advice is a document that a customer sends to a seller/freelance/commission earner that informs them that an invoice has been paid.
A higher deposit is often required from self-employed individuals. Self-employed individuals can often negotiate a more preferable interest rate on vehicle finance if they are in a position to pay a large deposit.
Is it possible to apply for vehicle finance with a bad credit record?
It’s possible to apply for vehicle finance even if you have a bad credit score or have been blacklisted. There is quite a stigma attached to having a bad credit rating but your rating is often not as bad as it sounds. It may only be because you have an account in arrears or have missed certain payments.
There are formal credit providers as well as microlenders who will allow you to lease a vehicle with a poor credit rating and even if you’re blacklisted. They require a minimum deposit and proof of a minimum gross salary. At the end of the lease period, you have the option of returning the vehicle or taking over ownership. The interest rate is usually onerous and you need to carefully read and understand the terms and conditions to avoid paying penalties.
Certain dealerships cater to customers who are unable to apply for vehicle finance through the regular channels because they have a poor credit record or are blacklisted. They offer in-house finance that’s covered by an outside auto lender. The vehicle finance interest rates offered by the dealership are generally higher than what the banks offer.
Keeping track of your credit score
It’s a good idea to keep track of your credit score so there are no surprises when you come to applying for vehicle finance. If a credit check reveals you score poorly or are blacklisted, it’s important to find out why so you can make amends. Start by getting a copy of your credit score from a credit bureau in South Africa such as TransUnion, XDS or Experian.
Your credit score is adversely affected for the following circumstances:
Account in arrears
When you have failed to make a scheduled payment(s) or have fallen behind in payments but no legal action has been taken yet by the credit provider. You need to approach the credit provider and negotiate terms to settle your debt.
If you are heavily in debt, you should consider applying for debt review with a registered debt counselling firm such as the National Debt Mediation Association which will help you negotiate terms on settlement amounts with the different credit providers.
Once your debt has been settled, you may approach a bank for vehicle finance; although you’ll still be viewed as a high risk applicant. If your application for vehicle finance is approved, you may be subject to stricter payment terms and a higher interest rate.
In default means that your debt has been handed over to an attorney or may be reported as “written off”. This usually occurs where the principle credit provider has sold the debt to a debt collection agency. If your debt is “owned” by an agency, you can negotiate a quick settlement if you’re in a position to pay off the debt amount plus interest accrued.
Once the debt has been settled in full, your credit record will reflect the fact; although the information will remain on record for a period of 2 years. Request a paid-up letter from the debt collection agency that you can hand in to the credit bureaus who will process the information to update your credit profile. This needs to be done well before you can approach a bank or auto lender for vehicle finance.
A judgement is the most serious issue to have on your credit record; meaning legal action has been taken. They are usually ordered by the magistrate’s court and can only be overturned if you pay your debt in full. A judgement is viewed in a very negative light by credit providers and it’s highly unlikely that your application for vehicle finance will be considered if you have one against you.
Be careful what you ask for
To sum up our guide to vehicle financing, we urge you to follow your head and not your heart when it comes to buying your dream car, caravan, bicycle, boat or whatever mode of transport you have your heart set on. Only buy what you can afford; in fact, it’s wise to buy for less than you can afford to give yourself some breathing space for unforeseen expenses that may crop up in the future.
Don’t just look at the monthly instalment. Remember, you also have to fork out for mandatory insurance and a protection policy as well as the cost of an annual service and general wear and tear. Finding yourself with a judgement against you because you cannot service your debt is no laughing matter. It’ll be a burden you bear for a long time and it’ll negatively affect your chances of applying for credit in the future.
The National Credit Act has your back. You’re entitled to structure the vehicle finance deal to arrive at a final instalment value that you can afford. Play around with the repayment term, interest rate, amount borrowed and deposit put down using the finance calculators available online and budget responsibly before you’ve even set foot in the bank or go near the dealerships.
What we do best:
- Business auto financing
- Second-hand finance for caravan, bike, truck and vans.
Why you shouldn’t buy a new car?
- You will pay more for a brand new car. Even if you enjoy a lower interest rate on your loan, a new car wil be more expensive, not only because of the higher sale price of the vehicle and higher sales tax – you’ll also pay more in other areas such as insurance.
- The value of a new car depreciates faster than that of a used one. The moment you drive that brand new car off the lot it starts to depreciate. The sad truth is that the a new car can depreciate between 20-30 % in its first year – and that’s just an average. Unless you are fortunate enough to buy the car cash, you will have to borrow money to finance it, which beckons the question: “Why buy an asset that immediately goes down in value by 20-30 %”
- Another reason you shouldn’t buy a new car is the unknown reliability for year model which can cause problems later on when the manufacturer switch engines or alter the design.