Recently I was asked about the option of car leasing in South Africa – because in places like the US, people talk about it being cheaper than the standard route of financing a car and then selling it/trading it in at the end. And I was surprised to find a few places that do it:
- Avis offers rental contracts of up to 33 months
- Pace Car Rental offers long-term rentals (in Johannesburg and Durban) – and they’ll even throw in free delivery of the car.
- Ariva does something similar, and they have “over 250 accredited dealers countrywide”. If you’re into this – I reckon they’re your best bet.
I guess I shouldn’t really be that surprised. There are plenty of us that don’t really care about what car we drive – we just want to get where we’re going, and not have to worry too much about servicing and repairs and replacing it at the end.
And just to be clear, I’m not talking about the “Lease” options that you get at Volkswagen and Mercedes and the like – those “lease” contracts require you to either buy the car or extend the lease at the end. That is: they’re finance leases. I’m talking about operating leases – where you have the right to use, with no obligation to do anything other than hand the car back at the end.
For the entrepreneurially spirited, this is quite a good business model:
- The car owner that leases out lots of vehicles gets to buy in bulk and negotiate good deals with the dealerships (including generous motor plans);
- He also gets to insure in bulk, which makes for other good deals;
- When people go over their prescribed mileage, he can charge punitive escalations; and
- At the end, he’s going to get the car back in relatively good knick for re-sale or re-rental, because he’s been in charge of servicing and maintenance. And if it isn’t in good knick – more punitive charges.
- He’s also going to be selective about which vehicles he chooses to lease – mainly those motor vehicles that hold their value over time.
So if you’re wondering “How is it that leasing can be a cheaper option in places like the US?” – then the answer if floating around in those economies of scale.
That doesn’t necessarily mean that the same applies in South Africa. We have less competition here (I could only find 3 agencies that offer something like this). And we’re new to this game – so in our heads, I suspect that we’re expecting to pay more for the leasing option.
As in: “Look at how much less I have to worry about! I ought to pay someone a bit extra to take that off my hands.”
Instead of: “We should both get to save/make money here!”
So I’m going to look at two options that I found:
- Pace Car Rental has a special on an automatic Honda Jazz at R7,800 per month.
- Ariva has a special on a VW Polo VIVO Hatch 1.4 Trendline at R4,299 per month (for 60 months).
- If you financed the car yourself over a 60 month period, you’d do 60,000km or so by the time you come to trade-in/sell.
- You’d buy the car with a fully comprehensive maintenance plan.
- You’d be paying around R1,000 per month for fully comprehensive insurance and tracker on your vehicle.
- There would be a 30% balloon payment at the end.
- In Ariva’s own words: “Research has shown that after 5 years your vehicle will over average be worth 35% – 45% of the original retail price.” So I’m going to call it at 40%.
- You put down a deposit of R40,000 on either car.
- You get an interest rate of 11.5%.
- Finally, the car prices (as drawn from their respective company websites this morning):
- Honda Jazz Comfort Automatic – R221,900
- VW Polo VIVO Hatch 1.4 Trendline – R170,912 (including a 5 year 60,000km maintenance plan)
The Honda Jazz
Here’s the comparison of monthly cash flows:
And here’s the cumulatively:
What that’s saying: it’s only cheaper to rent in the very short term (less than a year). At least, that’s the situation with this provider – who does seem more focused on month-to-month rentals.
The VW Polo VIVO Hatch
Now that’s more like it.
Over a 36 month period, you’re about ambivalent between renting and financing. If anything, you’re more inclined to rent – because at least you don’t have the hassle of trading in.
Thereafter, it’s starting to cost you. And by the end of the 60 month period, you’re about R40,000 out of pocket on the rental option. Which isn’t such a high cost – if you’ve not had to worry about anything other than fuel the entire time, and you don’t have to deal with secondhand car salesmen.
That said – I’m pretty sure that the rental contract you sign isn’t going to allow you to exit at the end of the 36 month period. And if it does, I suspect there’ll be penalties attached.
- The relative cheapness of this story is entirely dependent on your car replacement pattern. If you’re a serial replacer of vehicles, then renting might be a good idea. If you stick it out with a vehicle for years before you upgrade, then you should buy.
- The rental option isn’t available for high-end vehicles (at least, not from what I’ve see) – you’re really just looking at the mass market vehicles. So if you want an Audi or a Ford Focus, then my apologies – this article wasn’t for you.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.