Understanding your instalment sale agreement and tax invoice (Part 1)

If you are in the market to buy a car, you might decide to finance it by means of an instalment sale agreement. But do you have an understanding of this agreement and the accompanying tax invoice? In the first of our two-part feature, we ask Sbu Dhlamini, Head of Compliance at Absa to explain some of the terms used.

What does the principal debt mean?

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 over an agreed period, with fees and interest.

The principal debt is the total amount that a credit provider agrees to lend you and is made up of various amounts, 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, and
• Premiums for any credit insurance such as credit life or asset insurance required by the credit provider.

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

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.

• The cost of any extended warranty product taken up for the asset
• Delivery and initial fuelling charges, and
• Licence and registration fees for the asset

Video player requires JavaScript enabled. You can watch this video here: https://www.youtube.com/watch?v=v=LX3LFOqUhZU

What is the asset?

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?

Credit providers charge interest on the outstanding balance on your principal debt. Interest is calculated daily and debited monthly, quarterly or annually depending on the payment frequency that 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.