Should you buy or lease a car?

By Stuart Johnson

In the past year, car leasing has started to be much more popular in South Africa. For a number of years finance companies have offered leasing schemes for personal and fleet mobility, but with not too much interest in the leasing or long-term rental options..

However, there are signs that the local market is seeing a significant switch away from traditional vehicle financing to leasing.

We approached 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, 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.

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.

• Local demand for private leasing versus vehicle purchases:

In essence, the South African market is already starting to shift from the traditional Instalment Sale to the Lease agreement.

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.

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 mileage 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.