Vehicle leasing is on the rise in South Africa as consumers are becoming more financially savvy and understand that a car is a depreciating purchase, says Ghana Msibi, WesBank executive head of motor.
Speaking to BusinessTech, Msibi said that while most finance deals are done over 72 months, hardly any customers keep their cars for that long.
“Most transactions are terminated with a trade-in at around month 38. The leasing model presents an alternative for consumers who wish to change vehicles often without incurring financial penalties or depreciation,” he said.
However, South African buyers are fond of purchasing vehicles, with the prospect of owning their cars. For these buyers, conventional finance most often meets their needs, said Msibi.
According to Msibi, some of the main advantages of leasing a car include:
- New vehicle more often;
- No need to sell a vehicle;
- Shorter contract terms;
- More affordable instalments;
- Depending on how the lease is structured, insurance and maintenance can be included in the deal;
- No residual value (balloon) risk.
Some of the biggest disadvantages of leasing a car include:
- No ownership of vehicle;
- Limitations on vehicle usage: the client contracts up front the maximum number of kilometres allowed and any amount over will incur penalties;
- Penalties are levied on the early termination of the contract.
Msibi added that each application for finance is considered on a case-by-case basis.
“Given the number of variables, including the individual credit profile and interest rates, and the cost of the vehicle, we are unable to provide a conclusive example of how instalments would vary on a monthly or annual basis,” he said,
However, he said that WesBank has a range of finance and insurance calculators that allow consumers to play around with the variables for structuring their contract.
Msibi said that it is advisable to understand the various finance options available to consumers prior to making that buying decision.
Often, as a result of elevated excitement, consumers don’t ask enough informed questions during the purchasing process.
Below he provided an outline of the options to help consumers select a plan that suits their affordability:
Guaranteed future value (GFV)
Guaranteed future value, otherwise known as GFV, has become an increasingly popular form of vehicle finance amongst South African consumers.
This finance option appeals to the customer who is interested in ‘usership’ of the vehicle versus full ownership. A GFV plan calculates the future monetary value of a vehicle, provided the vehicle condition, mileage and maintenance agreements are adhered to.
This guaranteed future value helps consumers know exactly what their car will be worth once the pre-determined contract term, which is usually between three and four years, is reached.
At the end of the pre-determined contract term, the customer can either enter into another GFV deal and drive away in a new vehicle, settle the outstanding amount and own the vehicle, or simply return the vehicle to the respective dealership and walk away, provided the driver didn’t exceed the prearranged mileage and the vehicle is in an acceptable condition according to the agreed terms.
This is the most straightforward of all available vehicle finance options. Monthly repayments are calculated on the purchase price of a vehicle, minus whatever deposit is put down at the commencement of the deal.
Finance terms can be structured into time frames of between 12 and 72 months. The longer the term, the lower the monthly repayment will be. However, interest will add up over longer terms and the total amount repaid to the bank will increase proportionally.
Instalment finance with a balloon payment
This option is similar to instalment finance, except a portion of the purchase price is set aside so that the repayments are calculated on a lower amount.
Simply put, a balloon payment is similar to a deposit, except it’s payable at the end of a term instead of at the beginning. Consumers must be cautious and aware of the amount put into a balloon because they will be responsible for the lump sum at the end of the term agreement.
While it may be attractive to have lower monthly repayments because a larger chunk of the purchase price is placed into a balloon, the repayment of a balloon can be an inconvenient debt as this amount will either need to be settled or refinanced at the end of the deal.
“As a leading provider of motor vehicle and business finance in South Africa, we offer competitive financial options to suit individual and business needs,” says WesBank Head of Motor, Ghana Msibi.