New research from financial services company, AlphaWealth, highlights the advantages – and disadvantages – of leasing a vehicle in South Africa.
While vehicle leasing is a relatively new concept in the country, almost a third of consumers choose the option in the US.
Leasing is seen as a more attractive option over buying a car amid rising interest rates, rising petrol prices, inflation and a generally challenging economic climate.
South Africans tend to follow a more tradition financing model when it comes to purchasing cars they borrow money from the bank to make the purchase.
However, according to financiers such as Absa and WesBank, leasing is gaining popularity, especially in the higher-end premium brand market.
One key difference between leasing and a purchasing is that the motorist will not own the vehicle at the end of the lease term.
Lease contracts are typically structured for shorter terms – 36 months – while a vehicle finance contract can be between 12 and 72 months, depending on the buyer’s affordability.
Dale Scorer, Wealth manager at AlphaWealth, has broken down the advantages and disadvantages that come with leasing a vehicle.
According to Scorer, there are a few things prospective lessors need to know about their deal:
“At the beginning of the lease you need to select your annual mileage and it’s important you get this number correct as any excess mileage will be charged for,” she said.
“It is also exceptionally important that before entering into a lease agreement, you fully understand the terms, early termination policies and price calculations.”
Leasing vs buying: the cost
As an example, the group looked at a Mercedes A-Class 200 Automatic, with a purchase cost of R437,450.
Assuming a deposit of 12.75%, proposed km/annum of 20,000, and a lease and finance rate at prime, a 36 monthly repayment works out at:
- Lease: R5,000 per month
- Purchase: R11,530 per month
At the end of the agreement, a leaser can sign a new contract, return the car and walk away, or settle the guaranteed future value and take ownership.
A purchaser will own the vehicle, or can trade it in.
These are the advantages and disadvantages of leasing, according to AlphaWealth.
The advantages of leasing
- The monthly payments on a car lease may be significantly less than those you would have incurred had you financed a loan on the same vehicle – it may actually cost less to lease a new car over a short period of time, than it would cost to buy the same car and trade it in.
- Since lease payments are usually lower than monthly loan payments, you have the opportunity to invest the difference in cost.
- You face no resale risks, at the end of the term, you can return the car and trade in/sales price is not your concern.
- You have the opportunity to drive a new vehicle more frequently.
- Service/motor plan extensions and costs are not something that you need to worry about.
- If you own a business, leasing may provide tax benefits if the vehicle is used for business purposes.
- More choice and flexible end of agreement options.
- Demo and used vehicles can be leased, providing that the vehicle is less than 1 year old and has less than 20,000km.
The disadvantages of leasing
Make sure you consider:
- First and foremost, the mileage limitation – if you exceed your annual mileage, the charge will vary according to the vehicle purchased, from R2 – R8 per kilometre.
- If you lease your cars, you will always have car payments.
- A drawback to leasing is the audit process when returning a leased car. The lease agent will finely scrutinise the car to evaluate the damages done to the car. You’ll have to pay extra fees for anything not considered normal wear and tear.
- Breaking a lease early can be expensive.
“Leasing tends to be a more favourable option if you are the type of person that owns a new car every 3 – 5 years, either before it is paid off or once you can use the trade in for a deposit on a new car,” Scorer said.
“However, if you tend to be hard on cars, if you are ‘accident prone’, if you prefer owning a car debt free, or put a great amount of mileage on your car, leasing is probably not for you,” she said.