Important vehicle finance considerations

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“Almost a third of consumers are leasing their vehicles in the US already but the concept is relatively new here. It certainly has advantages for South Africans in light of rising interest rates, fuel hikes and a shaky rand, but whichever finance option you go for, make sure you know what you’re getting yourself into from the start.”

He explains that the main difference between a lease and an instalment agreement is that in a lease agreement the buyer will not own the vehicle at the end of the term, but can renegotiate the contract to take ownership for the residual value. Lease contracts are also for shorter terms.

“Generally, buying a car, paying it off and then keeping it for many years, remains the least expensive way to go because despite the fact that vehicles depreciate over time, they do retain some value that you can apply towards buying another car. If you lease a vehicle, you only drive it for a fixed period and your monthly payments go towards paying for the depreciation in the vehicle, not ownership. Lease agreements also come with restrictions on how many kilometres you can do during the lease period.”

Do your homework

How do you decide which option is better? Mc Master encourages prospective buyers to do their homework first; research the options and always be aware of the fine print.

“Bank finance can be costly as a large chunk of the monthly instalment goes towards interest payments. Banks also want to know that you have a spotless credit history and that you can afford the monthly payments on a vehicle.

“It’s a mistake to base your affordability on the repayment only. Research has shown that in the current market conditions, the actual monthly instalment of an entry-level vehicle accounts for less than 50% of the total cost of ownership.”

He adds that buyers must also budget for fuel, maintenance and insurance before deciding to go ahead with the purchase of a vehicle. “There are a number of value-added products which can be built into the monthly instalment but be careful of falling for all the trappings without a clear understanding of how much these will inflate your instalment.”

Examples of valued-added products are service and maintenance plans (used vehicles), dent and scratch protection, insurance shortfall cover and life, disability and unemployment cover.

Another crucial consideration, says Mc Master, is deciding on a linked or fixed interest rate because once you’ve signed the contract, this can’t be changed. Vehicle owners with a fixed rate contract would have been hardest hit by the recent interest rate hike.

“Now more than ever, a vehicle purchase should be thoroughly-researched and properly thought out. Always keep the practical use you want out of the vehicle in mind and consider your average mileage and the increasing cost of petrol,” he concludes.

Dos and don'ts

Top five dos and don'ts for prospective vehicle buyers:

Do...

• Draw up a budget to establish affordability.
• Leave enough spare cash in your budget to absorb rising costs such as fuel and interest rates.
• Take the time to read and understand your finance contract.
• Contact the bank if you are in a situation where you cannot meet your financial commitments.
• Make sure you always have comprehensive insurance on your financed vehicle.

Don’ts...

• Overextend your budget.
• Provide the bank with false information about your affordability.
• Cancel insurance when you are in a financial bind.
• Rely on a large balloon payment to make your instalments more affordable.
• Forget to include all costs in your mobility budget: petrol, insurance, and maintenance.

(Source: Wesbank)

Finance at a glance

Instalment sale:

• Take delivery of a vehicle and pay for it over an agreed period.
• You become the owner once you’ve made the final payment.
• You can opt for a balloon payment which reduces the monthly payments.

Lease:

• 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.
• The repayments are tax deductible for business owners who use the vehicle to generate income.
• You can opt for a balloon payment which reduces the monthly payments.

Rental:

• The buyer gets uninterrupted use of the vehicle rather than ownership of it.
• To reduce monthly payments, the customer can negotiate a residual value.