Lease — or leash?

For the true private buyer, the major element of a new car purchase is the finance. With most people focusing on the monthly repayment, they rarely calculate or appreciate how much interest they pay overall.

Finance houses offer incentive commissions to motor dealers that send business their way. This is based on the amount of interest paid on the instalment sale or lease, so it is in the bank’s interest not to have “cheap” cars on its books.

Private leasing has been touted as a financial cure-all — a view heavily supported by the banks — with the claim that longer repayment periods allowed in this kind of transaction mean lower repayments and make cars more affordable.

Currently, only financial leases are allowed in South Africa, and only on vehicles acquired for business use. Under these contracts, customers use the asset for the duration of the agreement in return for a monthly rental.

Such agreements do not require a deposit, which is why there is a move to extend leasing to private individuals. Because the vehicle is never owned, yet retains a residual value, monthly payments are lower than in, for example, instalment sales, where ownership eventually shifts to the purchaser.

But Colin Haynes, author of the soon-to-be-published Why the Wheels are Coming Off the Global Motor Industry, describes private leasing as “the globalisation of America’s new car scam of the Nineties”.

He argues that private leasing only benefits people in privileged positions. Others are placed in a situation in which they can never own a car — and end up paying more in the long run.

“In general, only the better-off minority, corporates and the self-employed who can claim tax concessions for vehicle use, or those who drive very high mileages for business reasons, or who can afford and prefer to change their vehicles every few years, can achieve worthwhile savings by leasing,” he says.

“Most motorists will pay far more to have the use of even an entry-level vehicle than they expect from the hype about low monthly payments. Many will also over-extend themselves, using leasing to drive a more expensive car than they can afford — or need.

Haynes says leases often lock first-time new car buyers “into an endless cycle of never-ending car payments. They will never own a car because they are not building up any equity to put down as a deposit when they want to change.”

The option to purchase at the end of a lease will probably exceed what an equivalent car would cost on the open market. In addition, the penalties for over-running the agreed mileages and for such minor routine damage as scratches and dents can be punitive.

Haynes adds: “Get stuck with a lemon or need … to change vehicles before the end of the agreed lease period [and you] will incur very expensive penalties. These can be so severe for average income earners in developing nations that losing a job or having a period of illness that prevent the user keeping up lease payments could lead to such hardship for a family that a home might also be lost.

“Unlike vehicle purchasing — even on hire purchase agreements — the user can never raise any money from what has been probably the first or second largest monthly expenditure because it is not enabling even a small ownership share in an asset.”

The bottom line, he says, is that lower monthly payments alone have no positive impact for the vast majority of first-time and entry-level buyers in reducing the total costs of acquiring or operating a vehicle.”

Leasing expert Nigel Webb, of Latitude Fleet Services, says: “Used-car values have dropped as a consequence of constant new car prices. The first year’s depreciation on a new car has dropped significantly and payment difficulties in the initial period will expose new car buyers to increased and long-lasting financial penalty.

“Sure, credit granting will evaluate the buyer’s capability to service this debt, but this may limit the numbers of new first-time buyers. Additionally, the longer repayment period and reduced resale values have the potential to force these buyers to keep their vehicles longer.”

Webb asks if stimulating the used car market is not a better solution to the affordability crisis.

“Used values have dropped in real terms and represent a substantial discount to new car prices. The challenge is to have volumes of quality, medium-kilometre vehicles available from an active new car market and to encourage fleets not to replace vehicles at the end of their life.”

He suggests that the private leasing option should be focused on buyers who have the understanding and financial capacity to better manage the risks associated with such options. “They will sustain the new car market and generate the required volumes of quality used cars.”

Colin Windell is the editor of Autonews