Financial services firm WesBank says that more individuals and companies in South Africa are choosing to lease rather than purchase a vehicle outright 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,” said Rudolf Mahoney, head of brand and communications at WesBank.
“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.”
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.
Under an instalment sale, the benefit is that ownership will pass to the consumer automatically once they have made the final payment, while under a lease agreement, you can choose to take ownership of the vehicle or return it to the bank at the end of the agreed period.
This way, you can drive a brand new car every two to four years and benefit from the safety, fuel economy and performance advancements found on newer models.
And for business owners who use the vehicle in an income-generating capacity, the repayments are tax-deductible.
Owning a car, however, carries none of the economic penalties or mileage restrictions experienced with leasing and renting.
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 instalments when buying;
- The instalments 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 responsible with 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.
The lender also provided an example of cost differences between lease and instalment sales for illustrative purposes only.
Buying vs Leasing cost
|Operating Lease||Instalment Sale|
|Vehicle Price||R400 000||R400 000|
|Deposit||R51 000||R51 000|
|Base Value||R349 000||R349 000|
|Km Per Annum||20 000||20 000|
|R6 474.48||R8 867.86|
- The above is an illustrative comparison of operating lease vs Instalment sale.
- 25% balloon payment on instalment sale (period dependent) – Risk to client.
- 50% residual value on operating lease (period/kilometer dependent) – Risk to lessor.