Buying vs leasing a car in South Africa

With almost a third of consumers now choosing to lease their vehicles in the US more than ever before, this method of financing is yet to properly catch on in South Africa.

According to credit information firm, Experian, 31.5% of new vehicles financed in the US in first quarter were leased – an all-time high, and up from 24% just five years ago.

The concept is relatively new in the country, but it can be seen as an attractive option amid rising interest rates, petrol prices, inflation, and a weakened Rand.

According to Wessel Steffens, head of Absa Asset and Vehicle Finance, leasing is still relatively uncommon in the South African retail market.

“We find that consumers still lean chiefly towards ownership of a vehicle, as they see this to be an investment, and in some cases as an achievement or affirmation of their self-worth,” he said.

Absa pointed to three key financing methods available to South Africans:

Installment sale:

  • This finance facility allows a person to buy vehicles and other assets, and pay for them over an agreed period.
  • The benefit is that ownership will pass to the consumer automatically once they have made the final payment.
  • Owning a car also carries none of the economic penalties or mileage restrictions experienced with leasing and renting.

Lease:

  • A lease agreement is not only available to companies, but also to individuals and self-employed people.
  • The lease agreement allows the customer uninterrupted use of the vehicle rather than ownership of it.
  • You can choose to take ownership of the vehicle or return it to the bank at the end of the agreed period.
  • 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.
  • For business owners who use the vehicle in an income- generating capacity, the repayments are tax-deductible.
  • Balloon options are also available under lease and instalment agreements – you will be obligated to pay this at the end of the term, but you benefit from reduced monthly payments.

Rental:

  • A rental agreement is available to individuals and offers you varying repayment periods like annual or quarterly.
  • Like a lease agreement, a rental agreement allows the customer uninterrupted use of the vehicle rather than ownership of it.
  • To reduce monthly payments, the customer can negotiate a residual value. Residual is normally the asset risk accepted by the bank as long as certain return conditions are met at termination of the rental.

“Each finance method provides different benefits to the client which vary based on whether you require ownership of the vehicle, whether the vehicle will be used to generate income, or whether you are a registered VAT vendor,” Steffens said.

“Lifestyle and life stage also play a big role in the option selected.”

Rudolf Mahoney, head of brand and communication at Wesbank said that traditionally, South African buyers have tended towards the conventional finance model, whereby money is borrowed from a bank to purchase a vehicle.

“Over the last year and a half WesBank has seen an increase in the number of offerings in the market that allow consumers to acquire vehicles through leasing or lease-type finance agreements. The majority of these offers are at the higher end of the market, from premium brands,” Mahoney said.

According to Wesbank, the main difference between a lease and a purchase is that the motorist will not own the vehicle at the end of the term.

Traditionally, lease contracts are for shorter terms – usually 36 months – while a vehicle finance contract can be between 12 and 72 months, depending on the buyer’s affordability.

Leases work on the premise of a large future value – or a residual value. These larger residual values make monthly repayments more affordable, the financial firm said.

At the end of the term the vehicle is then returned to the financier, at which point the financier will dispose of the vehicle in order to settle the residual value.

“The costs of leasing can be far lower than those associated with traditional vehicle finance, given that in some instances a residual value can be up to 60% of the cash purchase price of the vehicle,” said Mahoney.

Consumers forego the traditional costs associated with credit, and since lease periods are usually around 36 – 48 months, they do not have to be concerned with service and maintenance costs. These would be covered by the manufacturer’s warranty, service, and maintenance agreements, he said.

Wesbank noted that leasing is ideal for more discerning buyers who wish to drive modern vehicles, with the intention of replacing them on a regular basis. “When a lease expires consumers don’t have to be concerned with selling or trading in a vehicle they no longer want, nor will they have to worry about settling any outstanding fees or shortfall amounts,” Mahoney said.

For buyers who wish to remain free of debts or monthly payments would be better served by conventional finance, through which they can pay off and take ownership of a vehicle, until such a time as they need a replacement.

Wesbank warned that a lease agreement will often have strict limitations and penalties for the motorist. These will require drivers to stick to service schedules, approved repairers, and mileage limits.

The vehicle’s future value is affected by these factors. In many cases buyers may be required to limit total distance travelled, or face a penalty fee for each kilometre travelled beyond the agreed-upon distance, Wesbank said.

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Buying vs leasing a car in South Africa