The best way to pay for a car in South Africa

It’s easy to imagine that cash is king, even when buying a car, but that isn’t really an accurate assessment of the larger picture. While some car sales, specifically at the absolute bottom end of the used-car market, are often concluded on a cash basis, most “nicer” cars are bought with the aid of vehicle finance. 

Furthermore, even if you decide to finance your next car, there are various ways of paying for it. Here’s a brief overview of the various ways in which you could buy a car, with the main advantages and disadvantages of each type of transaction.

 

Outright cash purchase

This transaction can be sub-divided into two distinct types: physically taking out a stack of banknotes to pay for the car, or doing a direct bank transfer (EFT) from an account with sufficient reserves.

Apart from the fact that very few buyers actually have that kind of cash lying around, there are a few other drawbacks to the former. Using actual banknotes may make you feel affluent for a (short) while, but, apart from the significant security risk involved in carrying large amounts of money, you have to remember that your bank will charge you a hefty withdrawal fee to get it in your hands.

Conversely, the car seller’s bank will also charge a cash handling fee when they go to deposit the money into their account. So, unless your savings method involves stashing cash boxes under your bed, both you and the seller will lose quite a bit of money just to get those notes in your hand. This issue doesn’t apply as much to the other type of payment, which is an EFT from your bank account.

This route is usually preferable when paying for a car up front. Yes, there will be service charges (depending on your particular bank and account), but those are generally much lower than a cash handling fee. Many private car sales (especially of cheaper vehicles) are handled in this manner, but there are still security risks involved (such as non-delivery of the purchased vehicle and/or its registration document).

In short, be careful. There are always crooks on the lookout for easy victims, so ensure that the car, its documents, and its seller are above board before you transfer any funds from your account. By the same token, the seller should hold onto the car and its documents until the payment reflects in their account.

Related: Can you get car finance for a vehicle sold by a private seller?

 

Buying cash from a dealership

Very few dealerships will accept a stack of banknotes as payment for a car (for the reasons stated above), so we can discount that option in this scenario. “Cash” in this case refers to a direct fund transfer (EFT), and even this option isn’t popular among most dealers.

Why don’t dealerships like immediate payment, directly from the car buyer? Simply because their finance departments are incentivised to sign up new customers for their preferred FSPs – if you don’t finance your car, the FSP (Financial Service Provider) gets nothing from the deal, and thus doesn’t give anything back to the dealership. 

This practice is widespread among most dealers with an in-house finance desk. They’re committed to getting as many buyers into financed cars as possible, because that would turn into some cash for the dealership from the FSP’s side. And, the more finance deals they sign, the greater those pay-backs could become. It is but one of the many ways in which a dealership could derive a second income stream from a single transaction...

 

Hire-purchase financing (HP)

This is the most common way to pay for a car, which is done with the help of an (FSP). In essence, the FSP buys the vehicle from the seller, and then allows you to use it - provided you keep it ensured and pay them a pre-determined amount every month, for the duration of the finance agreement. 

Provided there isn’t a balloon payment (residual value) to be made, the car will become your property at the end of the finance agreement. If there is a balloon payment structured into the deal, that amount will still be outstanding at the end of the payment period, which can then either be re-financed, or recovered by selling the car to a third party (provided it’s worth more than the outstanding balance, that is). 

Related: What you need to know about buying a new car on finance.

 

Leasing

This is an entirely different method to get behind the wheel of a car, with lower monthly payments than a straight-forward HP transaction, and usually over a shorter time span. By signing up for a leasing deal, you essentially rent the vehicle for an extended period, following which you simply return the car and cease payments at the end of the agreement.

Leasing is more common with high-priced cars, where it is offered as an option to new-car buyers to shift the metal from the showroom floor at any cost. This type of agreement is bound to a specified duration, and also comes with pre-determined annual mileage limits. 

The main downside to leasing is that, after paying that monthly amount for a few years, you still won’t actually own the car – it remains the property of the FSP, who will sell it on in the used market after you’ve returned it. However, for some individuals, this may actually be a positive point, because it takes the responsibility of eventually selling the car away from the buyer, and may be a more-affordable way of getting to drive a new car more frequently.

Related: Can you cancel a car finance agreement early?

 

Which way is the best way?

There is no straight answer to this question, because the best way depends on the buyer’s individual needs and priorities.

However, and even though most dealerships won't be happy about this kind of transaction, buying cash (via EFT) at a dealership will be the most financially-savvy approach. Taking this route won’t let you won’t suffer the service charges and interest repayments of an HP deal, making for more money remaining in your pocket in the long run.

You will lose the interest that the money could have accumulated (as an investment), however. And, if you're drawing the funds from a personal loan, there will again be accumulated interest to settle in the long run, largely negating the interest savings you'd incur when compared to a normal HP deal.

Next up is the traditional HP transaction. Yes, you’ll be paying back interest and service charges (and be tied-up in a finance agreement) for years, but at least you’ll have something to show for all that money at the end of the finance term. The car will thus become your asset, and can then be sold to give you a solid deposit for your next finance agreement. 

As for leasing and balloon payments, they both offer a more-affordable way for buyers to drive off with a new car, but neither will leave those buyers with anything tangible to show after a few years of giving money to the FSP. For highly-paid professionals who may derive a tax break from frequently changing cars, leasing may however be the most-attractive proposition, largely because it removes the hassles of selling-on a car (or trading it in for much less than its retail value) at the end of the finance agreement.