South Africans returned to buying new vehicles in 2017 as consumers want cars that bring a promise of reliability as well as fuel-efficient technologies.
This is according to the most data from Wesbank, which found that the year-to-date new car sales for 2017 grew 1.8%.
“The new vehicle market’s positive performance for the last year was almost exactly in line with our forecast of 1.74% growth,” said Rudolf Mahoney, head of brand and communications at WesBank.
“This can be attributed to the rand being resilient in the face of volatility and the South African economy performing better than anticipated. However, the economy is still underperforming and faces a long road to recovery.”
In the second half of 2017, original equipment manufacturers (OEMs) were able to stave off price increases as the rand firmed against foreign currencies. This allowed manufacturers to pass value back to consumers through very attractive marketing incentives when purchasing new vehicles, he said.
However South Africans are also increasingly looking at leasing vehicles as opposed to buying vehicles, said Mahoney.
“In essence, the South African market is already starting to shift from the traditional instalment sale to the lease agreement,” he said.
“There is a growing demand for this type of transaction as consumers become more financially savvy and understand that a car is a depreciating purchase. Most finance deals are done over 72 months, yet hardly any customers actually keep their cars for so long; most transactions are terminated with a trade-in around month 38,” Mahoney said.
“South African buyers are fond of purchasing vehicles, with the prospect owning their cars. For these buyers, conventional finance meets their needs. The leasing model, however, presents an alternative for consumers who wish to change vehicles often without incurring financial penalties or depreciation,” he said.
“This allows consumers to make use of a structure similar to a lease, allowing for lower monthly instalments and a shorter contract period.”
Mahoney broke down some of the biggest advantages and disadvantages of buying vs leasing a car locally.
Leasing a car
A vehicle lease sees a consumer paying for use of a vehicle for a set period of time. At the end of this period the vehicle is returned to the vehicle manufacturer, dealership or finance house. Once the vehicle has been returned the consumer can choose to initiate a new lease for a new vehicle.
So, to summarise, the purpose of an instalment sale agreement is to buy the car and to own it once it is paid off versus the lease where you just pay for the usage of the car for a certain period of time without the intention to own it.
According to Mahoney, some of the advantages and disadvantages of leasing a vehicle include:
- Access to a new vehicle more often;
- There is no need to go through the hassle of selling the vehicle once your lease is up;
- The contract terms for leasing are typically shorter than vehicle installments when buying;
- The installments are typically more affordable;
- Dependent on how the lease is structured, insurance and maintenance can be included in the deal.
- There is no residual value (balloon) risk.
- You don’t actually the vehicle and there are limitations on vehicle usage (the client contracts up front the maximum amount of kilometres allowed and any amount over will incur penalties);
- Penalties are also levied on the early termination of the contract.
Buying a car
The conventional vehicle finance model called an Instalment Sale Agreement, and most popular in South Africa, involves obtaining a loan to finance the full purchase price of the vehicle. This can be used in conjunction with deposits to reduce the borrowed amount, as well as balloon payments, a lump sum that is paid at the end of the loan period.
When a buyer has paid the loan in full, ownership is transferred from the financier to the client and they become the vehicle owner.
According to Mahoney, some of the advantages and disadvantages of buying a vehicle include:
- You own the vehicle at the end of the term;
- There are no limitations on how you use the vehicle.
- Vehicle depreciation;
- Consumers are responsiblewith disposing/selling vehicle;
- Early termination of finance contract is difficult;
- Owner is responsible for the maintenance and insuring the vehicle;
- If there is a balloon payment then the client is responsible for the balloon value at the end of the term.