South Africans are well known for treating their cars as status symbols. Car finance figures show that on average, South Africans who are financing their cars tend to buy a new car every three years.

Simphiwe Nghona, executive head of Wesbank’s motor division says that due to affordability issues, the majority of customers are opting to finance their cars over longer periods of time. Nghona says, for example, if you take out a 72-month (six-year) car finance contract, the break-even point at which you will be able to sell or trade the car in without making a loss is usually between 42 to 49 months into the contract. “We are seeing that clients, on average, want to change their cars every 37 or 38 months, which means there is a shortfall,” he observes.

While we are not advocating that this is a sound financial decision, if you really want to drive a new car every three years then leasing, rather than buying, could be an option considering the shortfall that you are liable for if you finance the vehicle.

Keith Watson, managing director of car leasing firm Ariva, says approximately five to six per cent of consumers are now leasing cars, which is still a small portion of the consumers in the car market. Leasing a car is very similar to a hire purchase contract – the big difference is that when you lease, you will not own the car at the end of the contract but simply return it.

“In an environment where consumers want to change their cars every three to four years, leasing a car makes sense. At the three-year point, our clients have the option to trade out of the lease contract without penalties,” Watson says. However, if you want to opt out of a lease contract before three years, you have to pay a percentage of the outstanding contract amount as a penalty. The average term on a car lease contract is 58 months.

Listen to Maya’s discussion on Classic FM about whether to lease or buy a car

What cars can you lease?

Contrary to popular perception, the cars that are typically leased are not high-end models but what Watson refers to as “typical middle-market models” such as Hyundais, Toyotas, Volkswagens and Kias. Note that leasing a car is not the same as the special offer from a dealership, which offers you a “guaranteed buyback”, although Watson says it is a very similar concept.

When you lease, you can include a mileage restriction in your contract to reduce the cost of the lease. One of the benefits of leasing a car is that you are not locked into buying a particular car brand. “You can lease a Toyota Corolla for three years and then lease a Golf GTi for the next three years,” Watson says.

Insurance

If you lease a car, your insurance is included in the cost of the lease agreement. Watson says that Ariva has a bulk insurance arrangement with different insurers, which includes a tracking unit. Your insurance risk is assessed during the credit approval process for the lease agreement and the insurance includes the usual benefits such as roadside assistance with a flat excess of R5 000.

If you buy a car, you have to arrange your own insurance and this is usually an additional monthly cost, over and above the actual instalments for the car.

Tips

• If you consider buying a car with a “guaranteed buy-back”, make a note of any mileage limitations. In most cases, the fine print will specify that the car mileage must not exceed a certain number of kilometres each year.
• Watch out for residuals. A residual on a car purchase is an amount or a balloon payment that is deferred to the end of the contract term. This means that at the end of the hire purchase period, you are still liable for the residual amount. You either have to refinance the car, have the cash available to settle the amount or sell the car with the hope that the trade-in price you are offered for the car will cover the residual amount. Residual values typically range between 30% and 35%, although some unscrupulous dealers will take these residual values higher just to close a sale.