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Financing Your New Car – Understanding Complex Finance

financing a new carYou have found your dream car and unless you intend paying cash for it you need to arrange for vehicle finance. Most vehicle buyers will use vehicle finance provided by a bank/finance company.

Fortunately there are a number of finance options provided by banks & finance companies and choosing the right financing option is largely dependent on your cash-flow, tax status, and whether you intend using the vehicle to generate income and/or receive a travel allowance. HowStuffWorks has a great article about financing options.

Essentially the vehicle-financing options are

  • Installment Sale Agreement

  • Lease Agreement

  • Rental

The financing options are discussed in greater detail below:

Installment Sale Agreement

Previously more commonly known as a hire purchase agreement, it allows you to purchase a vehicle and pay for it over a period of time up to 60 months; you own the vehicle after making the final payment.

The main features of an Installment Sale Agreement are:

Ownership 

The bank or finance company owns the vehicle until you make the final payment.

Deposit 

A deposit is not required in terms of the National Credit Act, but in terms of its own internal credit policies the finance company may require a deposit depending on your current financial status.

Vat 

Is payable at inception and if you are a registered VAT vendor and use the vehicle to generate income you will be able to claim an input credit.

Tax 

If you use your vehicle for business purposes you will be able to deduct interest and wear and tear.

Lease Agreement

Provides you with the use of the vehicle while you make the monthly payments, ownership does not automatically pass to you, and however the agreement can allow for you to take ownership

Ownership 

The bank/finance company owns the vehicle, you can take ownership at the end of the periodthinking of moves subject to certain terms and conditions.

Deposit 

A deposit is not required in terms of the National Credit Act, but in terms of its own internal credit policies the finance company may require a deposit depending on your current financial status.

Vat 

Vat is capitalized at inception and can be claimed as an input credit if you are a registered VAT vendor.

Tax 

Lease payments are tax deductible if you use the vehicle for business purposes.

Rental Agreement

Similar to a lease except for the fact that VAT is not capitalized upfront, but included in the monthly rentals.

Ownership 

The bank/finance company owns the vehicle, you can take ownership at the end of the period subject to certain terms and conditions.

Deposit 

A deposit is not required in terms of the National Credit Act, but in terms of its own internal credit policies the finance company may require a deposit depending on your current financial status.

Vat 

Vat is included in the monthly rental payments and can be claimed as an input credit if you are a registered VAT vendor.

Tax 

Rental payments are tax deductible if you use the vehicle for business purposes.options to choose

Which Option Should You Choose?

That depends entirely on your personal circumstances and salary structure, but here are a few general rules of thumb:

  • Installment Sale Agreement 

    If you intend using the vehicle for private use and want to own your car then Installment Sales Agreement is the best option for you.

  • Lease Agreement 

    High mileage drivers and individuals who receive a car allowance and can deduct certain expenses against the car allowance would benefit from this option.

  • Rental Agreement 

    Individuals who are able to deduct the monthly rentals against their income and claim an input credit for the monthly Vat component will benefit from a rental agreement.

Conclusion

Deciding on the right vehicle financing option for you can be complex especially when you factor in the Income Tax and Vat deductions that you may qualify for – before purchasing a vehicle it is a good idea to consult with an accountant or financial planner.

Remember that know matter which vehicle financing option you decide on you should ensure that the vehicle is adequately insured, try and direct you to their own in-house insurance option. It will however pay you to shop around and compare insurance rates so that you can obtain the best car insurance.

Natasha Butler

Natasha Butler

Natasha is a copywriter and graphic designer. She is an official contributor to LoanFinder SA. She enjoys helping men and women find the best possible rate for a new vehicle. In her spare time she enjoys the outdoors and hanging by a cafe enjoying a cup of coffee.

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