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If you think an instalment agreement is the only way to buy a car, think again.
Head of vehicle and asset finance at Nedbank, Johann de Beer, says there are alternative avenues that are more affordable to buy the car you desire.
If you're in the process of buying a car, chances are you'll opt for an instalment agreement without giving it any thought.
That's because it's the form of agreement most of us are familiar with, and the one we generally accept as the default offering unless we're specifically presented with another option.
There's a good reason for that. An instalment agreement allows you to enjoy the full use of a car that you haven't yet paid for in full. And, by the end of the agreement, once you have paid it off, you own the car outright.
l This is how it works.
Your credit provider, such as your bank, buys the car from the dealer, and then sells it to you on credit. This credit is your vehicle-finance loan, which you pay off in instalments, generally monthly, until the loan amount is paid back in full.
l A lease agreement is a better option if:
You're the kind of person who changes cars every two or three years.
You use your vehicle for business purposes and claim the monthly payments as a deduction from tax. Then, you have no need to actually own your car outright.
In fact, having the freedom to drive the car might be more than sufficient, especially if you plan on trading it in when the next model is launched. That's where the lease agreement fits in.
With a lease agreement, your chosen credit provider will purchase the vehicle from the dealer on your behalf. You will then use that vehicle for a predetermined period, while paying off the principal debt, plus interest, fees and charges.
At the end of this period you have four options: Return the vehicle to the credit provider, purchase the vehicle, sell the vehicle, lease it for a further period or bring down repayments with a balloon payment.
Both an instalment agreement and lease agreement can be structured with a balloon-payment option at the discretion of your bank.
l Balloon payments provide a way of reducing your monthly repayments. If you will be using your vehicle for business purposes, and plan to replace it after a few years, then this may be the perfect option for you. At the end of the agreement period, you're left with a lump-sum payment that needs to be settled.
l You have three options at the end of the finance period: Apply to re-finance the balloon payment, trade-in the vehicle and use the payment to settle the outstanding lump sum, take ownership of the vehicle by paying the outstanding amount.