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According to an article by IOL, fewer than one in 5 South Africans own a car.
The National Association of Automobile Manufacturers of South Africa (NAAMSA) reported that new vehicle sales in 2023 decreased by approximately 3.6%- 4% compared to 2022 (from 363,692 units to around 347,695 units, though exact figures vary by source).
Thankfully, vehicle financing options like car loans, balloon payments and tax benefits can make owning a car your reality, even in this current economy.
In this guide, we’ll explain the pros and cons of car financing in SA. This will help you maximise affordability and avoid expensive mistakes!
Explore Pineapple.co.za for comprehensive car insurance that complements your car’s finance.
TL;DR – Our version of “I’m not reading all that, *SparkNotes pls.”
- Car loans allow you to finance a vehicle over 12 to 72 months (1-6 years), with fixed monthly repayments and full ownership after repaying the loan. However, higher monthly payments and interest rates can make this option expensive.
- Balloon payments reduce monthly instalments by deferring a large lump sum to the end of the loan. This makes financing more affordable upfront, but if the lump sum isn’t paid, it can lead to refinancing issues or repossession.
- Leasing a car offers lower monthly costs, often including maintenance and service plans, but you don’t own the vehicle and may face mileage restrictions and penalties for early termination.
- Regardless of your financing choice, comprehensive car insurance is a must. Get a 90-second quote for Pineapple’s affordable cover today!
Exploring Car Loan Options in South Africa
Traditional instalment agreements, a.k.a car loans, are the most popular vehicle financing option in South Africa. A car loan allows you to buy a vehicle through funding from the bank or a finance house and make fixed monthly repayments, typically 12 to 72 months.
By charging a predictable monthly fee, standard car loans make budgeting easier. Plus, after the finance term, you have full ownership of the vehicle, meaning it’s yours to cherish or sell for a new model.
Interest rates are something to consider when making traditional instalment agreements.
Factors like the repayment length, specific loan agreement terms, and credit score affect car finance interest rates. A good credit score generally means you’ll likely receive a lower interest rate or a more beneficial deal.
Some other drawbacks include higher monthly instalment fees. These could make the vehicle less affordable, especially if you haven’t factored in running costs like fuel and insurance.
An article by the Daily Investor found that “first-time buyers have been caught out, with 5.7% being unable to make repayments within one year of buying a vehicle.”
| Pros of Vehicle Loans | Cons of Vehicle Loans |
| Full ownership after repayment | Higher monthly payments compared to balloon options |
| Predictable monthly costs | Can have high interest rates |
| No large lump sum at the end | Requires good credit to qualify for lower rates |
| Resell the car anytime | The car depreciates over time |
Understanding Balloon Payments: Advantages and Risks
The presence of a balloon can only be one of three things: a birthday party, a clown convention, or car finance.
A balloon payment is a lump sum payment due at the end of the loan agreement term. How it works is that a portion of the car’s total purchase cost is deferred to the end of the loan’s term, making your monthly instalments more affordable.
After your selected loan term of 12 to 72 months is up, you’ll have to pay back the full balloon payment amount.
If you can’t settle the balloon payment in one fell swoop, the bank or finance house may allow you to spread these payments over 12 to 36 months. Not being able to repay this debt can lead to higher refinancing charges or repossessing the vehicle.
| Pros of a Balloon Payment | Cons of a Balloon Payment |
| Lower monthly instalments | Large lump sum due at the end |
| Easier short-term budgeting | Higher total interest paid |
| Can trade in or refinance later | Risk of owing more than the car’s value |
For example, say you buy a new vehicle worth R200,000.00 with a balloon payment of 30% for 48 months. That means, at the end of 4 years, you’ll still owe a whopping R60,000.00!
Alternative Car Financing Options: Leasing vs. Buying
Leasing involves renting a vehicle for some time (typically 2 to 4 years), the length of which will depend on the duration of the lease agreement. Once the lease ends, you’ll be expected to return the car to the leasing company.
If you’ve grown attached to the vehicle, the lessor or leasing company may allow you to buy it.
Another option is to renew the lease with the same or a new company for a new vehicle and a brand-new contract.
With leasing, instead of paying the vehicle’s full price, you pay for its depreciation. The contract terms are typically shorter, the instalments may be more affordable, and you can change your car as often as you change your undies (which we hope happens frequently).
Lease agreements typically also include car maintenance and service plans, helping to reduce unexpected repair fees.
However, as the name suggests, you’re merely leasing (borrowing) the car.
Ownership is not yours, meaning you cannot have customised car accessories! The lessor may also limit your driving, and exceeding the mileage could result in a penalty—an expensive one.
Speaking of which, you can ensure additional penalties for terminating the lease agreement early.
| Leasing a vehicle | Buying a vehicle (loan/balloon) | ||
| Pros | Cons | Pros | Cons |
| Lower monthly payments | No ownership | Ownership after loan term | Higher monthly repayments |
| Access to newer cars | Possible mileage restrictions | No imposed mileage restriction | Depreciation |
| Reduced maintenance costs | Early termination fees | Customisation | Maintenance cost |
| Hassle-free | No customisation | Potential for resale | Higher deposit/balloon fee |
As the cost of car buying continues to be a source of stress among South Africa’s middle class, alternatives to car ownership, like leasing, may continue to soar in popularity.
Tax Benefits of Car Financing Options
Tax benefits are probably the furthest thing from your mind when financing a car. And with good reason: In South Africa, tax perks are limited for personal use but can come into play for business or self-employed individuals.
However, if you’re using the car for commercial purposes or business use, that’s a different story.
Here’s how the tax implications when financing a car can affect your bottom line:
- Owning a car (loans or balloon payments). Financing a car through loans or balloon payments and using it for business purposes—say, you’re a freelancer making deliveries or a salesperson visiting clients—you might be able to claim tax deductions. So, if 60% of your driving is for work, you could claim 60% of those costs from the South African Revenue Service (SARS). South Africa’s Income Tax Act states that SARS can allow you to deduct a portion of the vehicle’s depreciation and running costs (things like fuel, maintenance, etc.) as business expenses, provided you keep a detailed logbook tracking the business’s mileage versus your personal mileage.
For example, a R200,000 car used 50% for business might save you a few thousand rand annually on your tax bill—nice, but only if you’ve got the records to prove it.
Full vehicle ownership could also mean you qualify for a capital allowance, provided the car is a business asset—just don’t expect a tax break for your daily commute to and from the office.
A quick word of caution: tax rules can be…tricky, to say the least. Not to mention the piles of paperwork.
So, before banking on these benefits, chat with a professional (a tax attorney or lawyer, charted accountant or SARS representative—if you can get them on the phone). They’ll be able to help, guide and advise you, ensuring you’re compliant and maximising any benefits available to you.
Conclusion
Financing a car shouldn’t be a decision you make mindlessly or carelessly. Take the time to consider your financial situation and long-term goals.
Standard car loans offer predictable monthly repayments, simplifying budgeting and allowing complete vehicle ownership. A balloon payment can lower the cost of your monthly vehicle instalments, giving you enough time to save for the hefty fee at the end of the loan term. A lease agreement allows you to enjoy freedom, mobility, and accessibility to new cars.
Whether you opt for a traditional loan, go big with a balloon payment, or choose the unconventional lease path, consider your options by researching, reflecting and comparing different car financing offers.
Oh, and don’t forget to comprehensively insure your ride while you’re at it.
What’s the point of owning your dream car if you can lose it in seconds to a freakish hailstorm, an unexpected collision or straight-up theft?
Click here for a 90-second quote for Pineapple’s affordable, comprehensive car cover!
Want to learn more?
Read more car buying guides on Pineapple.co.za:
- A Beginner’s Guide to Car Financing
- The True Cost Of Buying A Car: A Detailed Breakdown
- Budgeting for Your First Ride: Insurance, Fuel, Maintenance & More!
- 5 Things To Consider Before Buying Your First Car
Please Note: The information provided above is for informational purposes only; you should not construe any such information as legal or financial advice.
Pineapple (FSP 48650) is underwritten by Old Mutual Alternative Risk Transfer Insure Limited, a licensed Non-Life Insurer and authorised FSP. T&Cs apply.
