Vehicle finance: find out more about installment sales and financial leasing

Discover the benefits of vehicle finance in South Africa: flexible options for purchasing and using vehicles with predictable monthly payments

Por: WiredCabin Team em May 20, 2024

Main benefits of installment sale & financial lease

Installment sales and financial leases are flexible financing options that cater to individual and business customers’ financial needs. These methods offer financial planning benefits and facilitate vehicle acquisition, ensuring access to vehicles in a manageable way. Below, we list some of the top benefits Installment sale & Financial lease have to offer.

Predictable monthly payments

Both installment sales and financial leases provide the advantage of predictable monthly payments, allowing individuals and businesses to budget and plan their finances with greater accuracy.

Access to newer vehicles

Financial leases offer the particular benefit of accessing newer vehicles more frequently. Since leases typically last for shorter periods than loans, lessees have the opportunity to upgrade to a newer model at the end of each lease term.

This is especially appealing to businesses and individuals who prioritize having the latest vehicle technologies, safety features, and fuel efficiencies without the long-term financial commitment of owning the vehicle outright.

Lower initial capital outlay

One of the primary benefits of a financial lease is the lower initial capital outlay compared to purchasing a vehicle outright or through an installment sale. Lessees can often acquire a vehicle with little to no down payment, which conserves cash flow for other operational or personal financial needs.

This benefit is particularly valuable for businesses that need to maintain liquidity for other investments or unexpected expenses.

Tax benefits

Both installment sales and financial leases can offer tax benefits, though they differ in nature. With installment sales, the buyer may be able to claim depreciation and interest expenses on their tax returns, depending on the vehicle’s use.

For financial leases, lessees might deduct their lease payments as a business expense, offering a different form of tax advantage. These benefits can contribute to the overall financial efficiency of acquiring a vehicle through these financing methods.

Flexibility at the end of the term

Financial leases often provide flexibility at the end of the lease term. Lessees may have the option to purchase the vehicle at a predetermined price, extend the lease, or simply return the vehicle and opt for a new one.

This flexibility allows businesses and individuals to make the best decision based on their current financial situation and vehicle needs, without being locked into long-term ownership if it’s not advantageous.

Reduced responsibility for maintenance and depreciation

Leasing a vehicle can reduce the lessee’s responsibility for maintenance and depreciation. In many financial lease agreements, the lessor retains ownership of the vehicle, potentially covering certain maintenance costs and bearing the risk of the vehicle’s depreciation.

This arrangement can offer peace of mind to lessees, knowing that the financial impact of depreciation and some maintenance expenses are not their concern, allowing them to enjoy the use of the vehicle without some of the financial burdens of ownership.

Installment sale simulation

For the installment sale simulation, with a vehicle price of 300,000 ZAR, an annual interest rate of 10%, and a loan term of 5 years (60 months), without any initial deposit or balloon payment, the results are as follows:

Monthly payment: 6,374.11 ZAR
Total amount paid over the term: 382,446.80 ZAR
Total interest paid: 82,446.80 ZAR

This simulation demonstrates the financial commitments involved and these specific conditions, providing a detailed breakdown of monthly payments and total interest paid over the life of the loan.

Financial lease sSimulation

For the financial lease simulation, using the same parameters as the installment sale for direct comparison (vehicle price of 300,000 ZAR, an annual interest rate of 10%, and a lease term of 5 years or 60 months, with no residual value at the end for simplicity), the results are as follows:

Monthly payment: 6,374.11 ZAR
Total amount paid over the term: 382,446.80 ZAR

This simulation provides a straightforward comparison under the given assumptions. It’s important to note that in real-world scenarios, financial leases might include terms regarding residual value, maintenance, insurance, and other fees that can affect the overall cost. This simulation does not account for such variables and serves as a basic illustration of the payment structure.

Prerequisites to obtain the financial lease & installment sale

The prerequisites for obtaining vehicle finance, either through an installment sale or a financial lease, generally include a good credit score, a minimum monthly income, and occasionally a deposit.

Specific requirements may vary across lenders, but typically, to qualify for car finance, individuals must demonstrate the ability to repay the loan, which involves earning a sufficient monthly income—often stipulated by the lender—and maintaining a favorable credit history. Some lenders might require a minimum income ranging from R5,000 to R7,500 per month.

Additionally, the option to finance 100% of the car purchase is available, though the terms, such as interest rates and repayment periods, can differ widely among finance providers.

Financial institutions offering installment sale & financial lease

South Africa’s financial institutions offer a variety of vehicle financing options, including installment sales and financial leases.

Standard Bank, one of Africa’s largest banks, has been in operation since 1862 and offers a range of services, including personal, business, and corporate banking. Absa Group Limited, formerly Barclays Africa Group, has roots in over 100 years and is known for its digital banking solutions. First National Bank (FNB), one of South Africa’s “big four” banks, has been a pioneer in digital banking, offering flexible financing solutions for both new and used vehicles.

WesBank, a division of FirstRand Bank Limited, specializes in asset financing and is the leading provider of vehicle finance in South Africa. Nedbank, part of the Nedbank Group, provides a range of retail and corporate banking services and focuses on sustainability and innovation.

These institutions not only drive personal and commercial mobility in South Africa but also contribute significantly to the country’s economic growth. Their evolution towards digital banking has made banking more accessible and convenient for customers across the nation.

Banks and financial institutions that offer financial lease & installment sale

Several leading banks and financial institutions offer financial leases and installment sales, catering to a wide range of needs for personal and business vehicle financing. These options provide flexibility, enabling individuals and businesses to access new or used vehicles through structured payment plans that suit their financial situations. Below are some of the institutions known for their vehicle finance services:

Standard Bank Vehicle Finance

Standard Bank offers both installment sale finance and leasing options, allowing customers to purchase vehicles over a predetermined period or lease them with the possibility of ownership transfer at the end of the term. They conduct a comprehensive credit assessment and require a minimum monthly income for eligibility.

Wesbank Vehicle Finance

Wesbank stands out with its all-inclusive vehicle finance solutions, accommodating a higher minimum wage requirement for potential borrowers. Their vehicle finance process is simplified through a mobile app and online resources, making car buying straightforward.

Absa Vehicle Finance

Absa provides competitive vehicle finance options with flexible repayment terms and the potential for reduced monthly payments through balloon payments or deposits. They allow early settlement without penalties under certain conditions and require vehicle insurance for finance approval.

FNB Vehicle Finance

FNB covers a wide range of vehicle finance needs, including dealership finance, private vehicle finance, and leisure vehicle finance. They offer finance for a variety of vehicles, from cars to leisure vehicles like motorbikes and caravans, with specific age and price criteria for eligibility.

These institutions, among others, play a pivotal role in South Africa’s vehicle finance market, each offering distinctive features and benefits to cater to diverse customer needs.

Step by step to apply for the financial lease & installment sale

To apply for a financial lease or installment sale, the process typically involves several steps. While specifics can vary between financial institutions, a general outline includes:

Research and select a vehicle: Decide on the type of vehicle you need, considering your budget and preferences.
Assess your financial dituation: Understand your credit score and financial health to ensure you meet the lender’s requirements.
Choose a finance option: Decide between a financial lease and an installment sale based on your ownership and financial preferences.
Gather necessary documentation: Commonly required documents include proof of income, identification, proof of address, and sometimes a valid driver’s license.
Apply with a lender: Contact a bank or financial institution directly, through their website, or at a dealership offering finance options.
Undergo a credit assessment: The lender will assess your creditworthiness and financial history.
Approval and agreement: Upon approval, review and sign the finance agreement, noting terms like interest rates, repayment periods, and any upfront costs.
Finalize the purchase: With financing approved, you can proceed to finalize the purchase or lease of your vehicle.

Positives and negatives of the financial lease & installment sale

Financial lease pros:

Access to newer vehicles without full purchase commitment;
Fixed monthly payments facilitate budgeting;
Potential inclusion of maintenance, reducing unexpected expenses;
End-of-term options offer flexibility: return, buy, or renew lease;
Can keep debt off balance sheets, beneficial for businesses.;

Financial lease cons:

No ownership until potentially the end, and with additional payment;.
May include mileage limits and customization restrictions;
Early termination can incur substantial fees;
Typically, more expensive in the long run compared to buying.

Installment sale pros:

Results in vehicle ownership at the end of the term;
No mileage or customization restrictions;
Monthly payments contribute to equity in the vehicle;
Possible to include a balloon payment to lower monthly costs.

Installment sale cons:

Higher monthly payments than leases, generally;
Responsible for maintenance and repair costs;
Depreciation affects the vehicle’s value over time;
Balloon payments can lead to a large final payment.

Alternatives to financial lease & installment sale

In addition to financial leases and installment sales, South African banks and financial institutions offer various vehicle finance alternatives tailored to different needs and financial circumstances. Here are some notable alternatives:

Leasing: Similar to renting, leasing allows you to use a vehicle for a set period. You make monthly payments during the lease term and return the vehicle at the end, with the option to buy in some cases. This option often comes with restrictions, such as mileage limits.
Rent to own: This option lets you rent a vehicle with the intention of purchasing it later. A portion of your rental payments goes towards the purchase price. At the end of the rental period, you can choose to buy the vehicle, making it a flexible choice for those uncertain about immediate purchase.
Installment finance with a balloon payment: Similar to traditional installment finance but with a significant portion of the loan (the “balloon” payment) deferred to the end of the term. This lowers monthly payments but requires planning for the balloon payment due at the contract’s end.
Guaranteed Future Value (GFV) / Guaranteed Buy-Backs: This newer option guarantees the value of your vehicle at the end of the finance term, allowing you to trade in, buy out, or return the vehicle. It provides certainty about the future value of the car but comes with conditions regarding vehicle care and mileage.

Financial lease & installment sale average rates and fees

When considering vehicle financing options in South Africa, such as financial leases and installment sales, potential borrowers can expect a range of interest rates and fees. These costs can vary widely based on factors like the lender, the borrower’s creditworthiness, the vehicle being financed, and the specific terms of the financing agreement.

For financial leases:

Interest rates: The interest rates for vehicle finance, including financial leases, typically range from about 7% to 17%. The exact rate can vary based on the lender and the borrower’s credit profile.
Fees: Borrowers should also expect to pay various fees, such as initiation and service fees. These fees are included in the financing quotes and contribute to the total cost of the lease.

For installment sales:

Interest rates: Similar to financial leases, the interest rates for installment sales can vary. The prime lending rate for car loans has recently been around 10.75% but can reach up to a maximum of 27.5% in some cases.
Fees: In addition to interest, installment sales may come with additional fees, including initiation fees, service fees, and potentially early repayment penalties, depending on the terms of the agreement.

General considerations:

For both financial leases and installment sales, the interest rate might be fixed, meaning it stays the same throughout the term of the loan, or variable, meaning it can change with the prime rate. Fixed rates provide stability in monthly payments, while variable rates offer the possibility of lower payments if interest rates decrease.
The total cost of financing (including the interest paid over the life of the loan) will depend on several factors, including the interest rate, the term of the loan, and any fees charged by the lender.
The length of the loan term can also significantly affect both the monthly payment amount and the total interest paid. Longer terms can lower monthly payments but result in higher total interest costs.

Why choose installment sale & financial lease?

In essence, whether aiming for vehicle ownership through an installment sale or seeking the flexibility of a financial lease, South African financial institutions offer tailored solutions that cater to diverse needs.

These options are suitable for individuals seeking entry-level financing solutions, those with varying credit profiles, and businesses looking for efficient fleet management solutions, all with the convenience of digital management or the support of traditional banking services.