Start your journey to vehicle ownership with the help of our Street Smart video series, brought to you by Absa Vehicle Finance. “If you finance the purchase of your vehicle through a credit provider, it’s important that you fully understand the details of the instalment sale agreement,” says Absa’s SbuDhlamini.

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If you’re in the market to buy a car, you may decide to finance the vehicle’s purchase by means of an instalment sale agreement with a credit provider, such as a bank. In the first instalment of a 2-part feature, Sbu (Sibusiso) Dhlamini – head of compliance at Absa – explains some of the terms used in this agreement, as well as the accompanying tax invoice…

What does the principal debt mean?

Dhlamini:An instalment sale agreement between you and a credit provider allows you to buy a vehicle or asset using the principal debt, which you repay by means of regular instalments (usually monthly repayments) over an agreed period, along with fees and interest.

The principal debt is the total amount a credit provider agrees to lend you and is made up of various amounts, which are regulated by the National Credit Act.

These include:

The tax invoice amount or loan amount, being the total amount paid to a dealer for the asset, less any cash deposit or vehicle trade-in;An initiation fee, unless you pay this to the credit provider upfront;Additional fees or charges as set out in Section 102 of the National Credit Act; andPremiums for any credit insurance such as credit life or asset insurance (if required by the credit provider).

What additional fees or charges may be included in the principal debt?

Dhlamini: Fees and charges for additional services are regulated by Section 102 of the National Credit Act and may only be charged by the credit provider if you appoint them as your agent to arrange the services on your behalf.

These include:

The cost of any extended warranty product taken up for the asset;Delivery and initial fuelling charges; andLicence and registration fees for the asset.

What is the asset?

Dhlamini: The asset is the motor vehicle that you are buying and is described on your tax invoice and instalment sale agreement by referring to its make, model, year of first registration and engine/chassis number.

Interest rates may be variable or fixed – what does this mean?

Dhlamini:Credit providers charge interest on the balance outstanding on your principal debt. Interest is calculated daily and debited monthly, quarterly or annually, depending on the payment frequency you’ve chosen.

If the interest rate on your principal debt is variable, it will change as your credit provider’s “reference rate” changes. This is also known as the prime rate. A credit provider will let you know if there are changes in its prime rate and if there are any adjustments to your instalment amount due to the rate change.

If the interest rate on your principal debt is fixed, the interest rate will stay unchanged for the full term of your instalment sale agreement – regardless of whether the prime rate is adjusted up or down.

ICYMI: Variable vs Fixed interest rates: The Pros & Cons

Other episodes in ourStreet Smart video series:

In the first episode of our series – brought to you by Absa Vehicle Finance, Fulufhelo Mandane (Absa’s head of dealer relationships for Gauteng and Limpopo) discussed what you need to consider before you start shopping for a vehicle, the costs of ownership and your various finance options. Absa First-time Buyer Guide to Vehicle Finance

In the video that followed, Mandane’s colleague Gordon Wood (Absa’s head of dealer relationships for KwaZulu-Natal & Mpumalanga) detailedhow the newAftermarket Guidelines, which were recently introduced in the motor industry, affectyou as a vehicle owner.Absa’s Guide to Responsible Vehicle Ownership

More recently, Michelle Moodley (Absa’s head of sales enablement) emphasised the importance of takingprecautions to avoid falling into fraudsters’ traps.Vehicle Sales Fraud: What to look out for

Related content:

The New Normal, Podcast 3 – Time to revise your car insurance?

The New Normal, Podcast 2 – Car Dealerships of the Future

The New Normal, Podcast 1 – Changes in SA’s car-shopping patterns