Mandy Collins
At some stage, hopefully, most of us will progress from owning the most dilapidated car on the block to buying a new or good second-hand car. This usually means trying to understand the world of car finance.
The cutting-edge option is time-share. Reportedly, some people have paid R20 000 for a share in a BMW Z3. For this small fortune they get to drive the roadster for one week annually for five years.
For those who want more wheels for their money, a more conventional route is to buy a whole car.
First work out how much you can afford on monthly instalments, and calculate the lump sum this translates into. You should also decide whether you want to get financing from your bank or the dealer.
Craig Cloete, head of asset-based finance for Nedbank’s Nedcredit, suggests you get advice and pre- approval from your bank.
“Car financing is not way-of-life stuff,” he says. “Most people buy a new car once in five years and they forget how it worked last time.
“Also, you should be able to negotiate a better deal by going to your bank first, because they have a realistic view of you. Many dealers have finance houses on the floor, but will tend to gear the deal towards the price rather than the customer.”
Generally you have two purchase options. Under an instalment sale, the bank buys the chosen vehicle on your behalf. You make regular repayments and ownership automatically passes to you once the vehicle has been fully paid for.
Value-added tax (VAT)is usually charged when the agreement is drawn up, but there are no VAT implications at the end.
Leasing means that you use a car for an agreed period of time with the choice at the end either to return the car to the bank, to continue renting or to acquire ownership.
Here VAT is usually charged at the beginning of the agreement and VAT at the end of the contract depends on what you do with the car. If you decide to take ownership, there is no VAT.
Tax implications in buying a car vary, depending on whether it’s for private or business use.
Stannic’s managing director, Dave Brown, explains: “The law differentiates between an individual who uses the asset in the production of income and is therefore able to claim certain allowances for income-tax purposes, and one who uses the vehicle purely for private purposes.”
Private car owners are restricted by legislation: currently the maximum finance period is 54 months and the minimum deposit is 10%. Business users, on the other hand, don’t face these limitations – you could, for example, finance the vehicle over 60 months and pay no deposit at all.
You qualify as a business user if you get a car allowance or if you use your car for business purposes without reimbursement from your company. As a business user, you have to keep accurate records of expenditure as well as business and personal mileage for the taxman.
Business users can also make use of residual values and balloon payments, and this is where people usually get tied up in potentially costly knots, since the two differ in one subtle but important way.
Say at the end of your payment period the car has a significant resale value. When the purchase contract is calculated, that resale value is subtracted from the price you are paying for the car, and your repayments are calculated on the remainder. So if you buy a car for R100 000 and build in a R20 000 balloon or residual, you will only be paying back the interest and capital on R80 000 up until the last month, when R20 000 will be owing.
And this is where the difference between balloon and residual payments comes in. With balloon payments, it’s your responsibility to cover that resale amount at the end of the period. This could be a problem if you are unable to sell the car, or have to sell it for less that the amount you owe the bank.
However, with a residual, the bank picks up the tab and you hand over your car keys to the bank. Of course you’ll have paid for the safety net, usually in the form of higher interest rates.
Nowadays many financial institutions offer a system whereby you can reduce your interest bill by putting extra payments into a linked account.
Some banks will allow you to settle your repayments early without penalties, and the surplus cash deposited may often be withdrawn at any stage.
ENDS