How company fleet car leasing works

By Stuart Johnston

According to an expert we spoke to on vehicle financing, defining a fleet of vehicles is a very broad term. A fleet could be defined as anything from a couple of cars to a few hundred cars or pick-ups.

 In essence  a  manufacturer would give a dealer an extra fleet discount for fleet sales. A fleet owner would register with a manufacturer, and a dealer would act on behalf of a manufacturer. A manufacturer would not trade directly with a fleet owner.

On a full-maintenance lease, according to our expert (who didn’t want to be named for professional reasons),  the costs would be ascribed on the company balance sheet as a straight expense. On an installment finance scheme, the vehicle would go on the balance sheet as a depreciating  asset.

“ Most finance companies offer both conventional installment financing, where the vehicle belongs to you after the final installment has been paid, or a full maintenance lease scheme, where the vehicle is simply listed as an expense.

“In my experience, both finance schemes are pretty similar in terms of costs, at the end of the day.”

The use of a company fleet car

How a company vehicle is used by an employee varies according to the employment contract. If an employee uses that vehicle for private as well as business use, then there will be tax implications for the employee.

Wesbank supplied AutoTrader with the following differences between leasing and buying a car

Rudolf Mahoney, Head of Brand and Communications at WesBank, to give us the lowdown on car leasing, and the following is Mr Mahoney’s summary of the differences between traditional financing and leasing:

The differences between leasing a car and 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.

In contrast, 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, in summary, 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.

The advantages and disadvantages of leasing a vehicle.

Vehicle lease advantages:

New vehicle more often, no need to sell a vehicle, shorter contract terms, more affordable instalments. Dependent on how the lease is structured, insurance and maintenance can be included in the deal.No residual value (balloon) risk.

Vehicle lease disadvantages:

No ownership of vehicle and 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

The advantages and disadvantages of buying a vehicle.

Vehicle finance advantages:

Vehicle ownership at end of term, no limitations to vehicle use.

Vehicle finance disadvantages:

Vehicle depreciation, consumers tasked 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. 

Regarding the costs of vehicle leasing, versus traditional financing

 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. WesBank has a range of Finance and Insurance calculators that allow you to play around with the variables for structuring your contract.

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.

Guaranteed buy-back options

WesBank has partnered with vehicle manufacturers to offer innovative finance deals with a guaranteed buyback structure. The “hybrid” GFV (Guaranteed Future Values) transaction remains an instalment sale agreement, but the OEM places a large balloon payment at the end of the term. The OEM guarantees should the contract conditions (similar to a lease, where there are limitations) be adhered to, the OEM will take the vehicle at the end of the term and guarantee payment of the balloon value.

This allows consumers to make use of a structure similar to a lease, allowing for lower monthly instalments and a shorter contract period.