A cousin of mine who lives in Holland said: “When we are finished with our cars we just throw them in the canal.” I think (hope) he was joking about the canal part, but the point is that in Europe they have virtually no second-hand car market and the majority of people lease their vehicles.
South Africans, however, have always placed a value on second-hand cars, but the landscape is changing. Murray Price, managing director of iLease, says South Africa’s previously high inflation environment meant that new car prices were soaring 3% every quarter, so second-hand cars maintained a relatively good value.
Now, however, in a lower inflation environment price increases on new cars are minimal and people are opting to buy new rather than second-hand. This means the bottom has fallen out of the second-hand car market.
Car owners find themselves in situations where they might owe R50Â 000 on their car, but can sell it for only R30Â 000, creating negative equity.
Price says these conditions favour leasing. When you lease a car for a set period of time you pay for the use of the vehicle and, at the end of the period, you hand it back.
The concept of operating leases for individuals was only introduced in June with the National Credit Act. Unlike financial leases, which are effectively instalment sales where you own the car at the end of the period, operational leases are purely rental fees for using the car over a certain period of time or maximum mileage.
The idea behind leasing is that you do not invest in a depreciating asset. The day you drive a new car out of the showroom it devalues by about 25%.
Price says iLease calculates the depreciation of the vehicle and charges for that rather than the cost of the car. So, for example, if the car costs R100Â 000 but at the end of the five-year period iLease calculates that the car will be worth R40Â 000, it will price the leasing instalments at R60Â 000.
Price says iLease obviously makes a margin, but the same is true whenever you buy or sell a car.
How leasing works
You can lease a car from anywhere between 12 and 60 months. But the shorter the period the higher the monthly payments, because the bulk of the depreciation occurs in the first year.
In addition, your monthly rental charge is determined by the amount of kilometres you estimate you drive a month. The cars are monitored by the company and, if you exceed this figure, an excess charge of between 35c and 65c a kilometre is levied.
The lease includes roadside assistance and annual licence renewal and can include a maintenance plan at an additional rental fee.
The pros
There is no upfront deposit, which makes it more affordable. If you have the money for a deposit but decide to lease rather than buy, you can put that money into your bond rather than a depreciating car (on average, cars depreciate by about 50% in five years). So R20Â 000 deposited into your bond creates a R36Â 333 saving in five years.
As this is a rental agreement it does not fall under the National Credit Act, which simplifies the process. But Price says the company is still careful to ensure the customer can afford the lease payments because it does not want defaults.
The leasing payments are lower than hire-purchase, which makes it more affordable.
The sensible option would be to use these savings to increase your monthly bond payment rather than upgrading to a more expensive car.
You hand the car back at the end of the period and you have no balloon payments and no risk on the resale of the car. For people who use their cars extensively for business the high mileage can make resale a problem and leasing reduces this risk.
The cons
You do not own the car at the end of the period so you have nothing to show for it and you have to lease or buy a new car. If you change cars every few years, this might not be a problem. If you plan to keep your car for longer, however, leasing might not be the right option for you.
If you cancel your lease before the period is over you will pay 30% of the remaining payments to cover depreciation. But you could be in a similar situation if you bought a car and were unable to make the monthly payments; the amount owing could end up being more than the amount for which you could sell the car.
Juggling the numbers
An operating lease on a VW Polo Classic 1,6 over 60 months with an estimated mileage of 120Â 000km would be R2Â 515 a month. The same car purchased through an instalment sale would be R3Â 194 a month.
Over the period you would pay R40Â 740 extra for the instalment sale, but would own the car. Based on the prices of cars for sale in Auto Trader, a five-year-old VW Polo Classic would cost about R76 900 (this is not necessarily the price the seller will get) and represents a 43% depreciation over the period.
If you had invested the monthly saving of R679 in your bond you would have decreased it by R54Â 774.
The operating lease on an Audi A4 2,0T would be R5Â 481 a month compared to an instalment sale of R6Â 505. Over a five-year period you would pay R61Â 440 extra for the ownership of the car.
In Auto Trader, a five-year-old Audi A4 2,0 is for sale for just under R100Â 000, representing a 54% depreciation. If you paid the R1Â 024 saving a month into your bond, you would reduce your bond by R82Â 605 over the period.
Alternatively you can use the saving to opt for a full-maintenance lease, which includes all fair wear and tear maintenance. The full maintenance rental is R2Â 810 a month for the Polo and R5Â 580 for the Audi.
Easy tax
Andre van Staden of Exord Payroll Solutions says for self-employed people the rental amount paid on an operational lease is fully tax deductible (making allowances for private use) compared to an instalment sale, where only the interest portion is tax deductible.
“It is a lot simpler from a tax point of view to calculate as you don’t have to include depreciation and it does not sit on your balance sheet as an asset,” he says.