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How car finance works in South Africa

Most people compare car finance on the monthly instalment. That is the wrong number. A lower instalment usually means a longer term, a balloon payment or both, and you pay more in the end. Here is how car finance works, and how to compare two offers properly.

This article explains the National Credit Act in general terms. It is not financial advice on your own agreement.

How an instalment sale works

Most car finance in South Africa is an instalment sale agreement:

• the bank pays the seller for the car;
• you pay the bank a deposit, if any, and then a fixed number of monthly instalments, which include interest;
• the bank legally owns the car until you have paid everything; you are the registered owner who uses it and is responsible for it;
• the bank requires comprehensive insurance on the car;
• if you stop paying, the bank can repossess the car, sell it, and still claim from you any amount the sale does not cover.

Three things decide what you pay

The amount you borrow. This is the price, minus your deposit, plus any fees or extras added to the loan. Every R10 000 more deposit means R10 000 less borrowed, a lower instalment and less interest.

The interest rate. Your rate depends on your credit record, your income, the deposit and the car. It is either fixed for the whole term, or linked to the prime rate. A linked rate starts lower, but your instalment can rise if interest rates go up.

The term. Common terms are 48, 60 or 72 months. A longer term lowers the instalment but raises the total interest.

What a longer term really costs

Take a loan of R70 000 at 13% a year. Stretching it from 48 months to 72 months lowers the instalment by R473 a month, but costs R11 033 more in interest. You are also still paying for a car that is getting older.

The fees

On top of the interest, a credit agreement may include:

• an initiation fee, charged once; it is often added to the loan, so you pay interest on it too unless you pay it in cash;
• a monthly service fee, charged with every instalment;
• credit life insurance, if the lender requires it;
• extras added to the loan, such as an extended warranty or paint protection.

The National Credit Act caps the credit fees. A dealer may also charge "admin" or "on the road" fees, which are part of the price. Ask for each one in writing, and ask what it is for.

Your rights before you sign

• The lender must check that you can afford the loan.
• The lender must give you a written quotation in plain language. It shows the price, the deposit, the amount borrowed, the interest rate, every fee, the instalment, the number of payments, any balloon and the total cost. It is binding for five business days.
• You may ask for the agreement to be explained. Never sign what you do not understand.
• You must get a copy of the signed agreement.

How to compare two offers

Ask each lender for the written quotation, and compare the total cost, not the instalment. The instalment tells you whether you can manage each month. The total cost tells you whether it is a good deal.

This article is based on Chapter 6 of Buying Your First Car. Chapter 7 covers balloon payments and the other finance traps.