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Financial Leases vs Instalment Sales

By Bidvest Bank
02-10-2015
There are various ways for you to finance your vehicle or those of your staff, depending on your needs. But which one is best? We run through the difference between financial leases and instalment sales specifically below, so you can pick the best option for you.

Financial Leases

A financial lease is when a financing company like a bank loans the individual or a business money in order to buy the asset (i.e. the car). This type of financing arrangement enables you to claim the sum of actual repayments made during the tax year as an expense against taxable income.

Instalment Sales

An instalment sale is when the financing company such as Bidvest Bank loans the individual or a business money in order to buy the asset (i.e. the car) but, instead of being able to claim the repayments as an expense SARS allows you to claim back a wear-and-tear allowance, as well as finance charges. The annual wear-and-tear allowance is generally 20% of the original purchase price claimed each year over five years.

So, which option is right for me?

According to Byron Corcoran, Head of Fleet management and Asset finance at Bidvest Bank, many South Africans are not on the best financing arrangement for their needs. “About 95% of consumers in SA that are receiving travel allowances are utilising instalment sales to finance their cars, but they should be on financial lease contracts to maximise their tax claims”, says Byron. 

And why is this? Because the wear-and-tear write-off with an instalment sale is 20% per annum, it only makes sense to use this type of financing agreement if the time period of your agreement is for five years or more. For example, if you buy a second-hand car and have a three year instalment sale agreement, you can only write off 20% p.a. and 20% x 3 years = 60%, so effectively you are losing out on 40% of your reduction. 

It’s also quite common to place a deposit down on an instalment sale. On a financial lease, anything that you put down as a payment to the bank is tax deductible, including your deposit. However, on an instalment sale, you can only claim finance charges and wear and tear – you can’t claim the deposit, so this is another way you’re not making full use of your tax deductions.

If you’re still not sure which financing option is best for you, you can use our handy online calculators to work out which option suits you the most. Alternatively, get in touch with our Fleet management and Asset finance team to find out more about how we could help.