Financing your vehicle

The way you choose to finance your vehicles can have a substantial impact on cash flow, your tax bill and balance sheet…

Effective vehicle finance is a blend of many factors, including company policy, structure, cash flow, timing, tax-effectiveness and fleet-management tools. Carefully consider which route will best suit your circumstances as there are several options available at present.

Installment sale

An installment sale (the old hire purchase) is an agreement where the vehicle is sold to you by the bank over a negotiated time frame, at an agreed interest rate, with agreed monthly payments in accordance with the National Credit Act. Ownership is passed on once the final payment has been made. Although a deposit is not legally required, you may have to pay one depending on the credit risk assessment of the transaction. This finance facility allows you to buy vehicles, as well as other assets. Features:

• Deposits are negotiable.
• Balloon payments can be structured into the agreement. A balloon payment is a lump sum which must be paid at the end of the transaction. These can be very dangerous.
• You can finance the vehicle over a maximum period of 60 months.
• The bank owns the asset during the term of the finance agreement; ownership is passed to you automatically once you have repaid your debt in full.
• You can trade in the asset once you have repaid the bank in full.
• Market-related interest rates apply, which may be linked to the prime lending rate or fixed.
• You are required to have the asset comprehensively insured for the period of the contract.
• VAT is capitalised into the principal debt or paid when the agreement starts as an initial payment. Your copy of the agreement can be used as a VAT invoice, if you are able to claim an input tax.
• There are no VAT implications for early settlement.
• The asset should be capitalised according to the General Accepted Accounting Practice (GAAP) and the liability reflected on your balance sheet.

Finance lease

The lease agreement allows your business uninterrupted use of the vehicle rather than ownership of it. You can choose to take ownership of the vehicle, or return it to the bank at the end of the agreed period, subject to the conditions of your agreement. An initiation fee and a monthly service fee are charged on all new contracts. There is no deposit and the bank insures the asset. Features:

• Lease payments are tax deductible. If an input credit has been claimed in respect of VAT paid, tax deductions will be limited to lease payments, excluding VAT.
• VAT is capitalised into the principal debt or paid on commencement of the agreement as an initial payment. Your copy of the agreement serves as a VAT invoice, if you are able to claim an input tax.
• The asset should be capitalised according to the General Accepted Accounting Practice (GAAP) and the liability reflected on your balance sheet.
• There are no VAT implications at the end of the agreement period, unless you enter into a new rental agreement. In this case VAT will be levied on each rental.

Full maintenance lease

This agreement includes maintenance of the vehicle based on the mileage you expect to travel. The lease period, interest rate, monthly rental and maintenance package are negotiable. Features:

• VAT is not capitalised upfront, but is payable on each rental.
• Payments include VAT and are tax deductible. However, where you have claimed an input credit for VAT paid in respect of the rental, tax deductions will be limited to rentals, excluding VAT.
• The asset is not reflected on your balance sheet. The rental is, however, shown as an expense on your income statement.

Operating lease

Leasing gives you the right to use the vehicle for an agreed period during which you pay a rental. At the end of the term, you return the goods, acquire ownership or extend the lease. Note that VAT will be paid on each installment and not capitalised in advance.

Rental

This facility is similar to a lease. Features:

• Rentals are tax deductible. However, where you have claimed an input credit for VAT paid in respect of the rental, tax deductions will be limited to rentals, excluding VAT.
• VAT is not capitalised upfront. It is added to each rental payment.
• There are no VAT implications at the end of the agreement period, unless you enter into a new rental agreement, in this case VAT will be charged on each rental.

This option works like a house rental where you have uninterrupted use of the goods. You pay a monthly rental calculated at an agreed interest rate. At the end of the term, you can decide to return the goods, or take ownership, subject to various conditions.

The primary difference between a rental and other agreements (other than a lease) is that with a rental, VAT is charged monthly and not on the full purchase price at inception.

• Periods range from 12 to 60 months for business use (12 to 54 months for private use).
• Interest is calculated at either fixed or prime-linked rates.
• The goods must be fully insured during the agreement, usually by the rental company.

There is no significant difference between a long term-rental and a full maintenance lease, though rental is a much more expensive option because you are charged per day. The lease contract duration is normally a minimum of six months. You can buy the car afterwards in both cases, though your notice period with a rental is shorter.

Full maintenance rental

This is like a normal rental except it includes vehicle maintenance.

Fleet management contract

There are several variations of fleet management deals and it may be an option even for a small fleet. Speak to your bank for more information.

Note on fitting of optional extras

Many South African motorists mistakenly believe that by purchasing accessories for their vehicles, they are adding to the value of their cars. However, according to used car guru Darryl Jacobson, this is seldom the case.

Jacobson, the managing director of vehicle auctioneer Burchmore’s, warns that motorists should never expect to recoup their “investment” in accessories. “Aftermarket accessories are not investments; you should enjoy them for what they are, and never expect them to boost the value of your car,” he advises.

Where accessories do assist, however, is in securing a deal. “They may well make the car easier to sell,” comments Jacobson. “After all, if the buyer can choose between two identical cars in similar condition – one with and one without a CD player, it’s obvious which one he or she will select.”

Whatever you do, don’t just accept what the sales people at the dealership offer. They get commission from the banks on the sale of the finance and could be tempted to push the scheme that pays them the most commission. Always check with your own bank.