Should you lease or buy a car?

A majority of South Africans tend to stick to the conventional vehicle finance model i.e. installment sales agreements or taking out a loan to finance a vehicle. However, due to the current economic disruptions leasing might be seen as a more attractive option.

Rudolf Mahoney, head of brand and communications at WesBank, highlighted: “There is a growing demand for this type of transaction, as consumers are becoming more financially savvy and understand that a car is a depreciating purchase. Most finance deals are done over 72 months, yet hardly any customers actually keep their cars for so long, most transactions are terminated with a trade in at around month 38.”

The difference between buying and leasing a car

The difference between finance and leasing is when a buyer has paid the loan in full, ownership is transferred from the financier to the client and they become the vehicle owner. So why would consumers want to lease a vehicle instead? We take a look at the following advantages and disadvantages.

The following advantages of leasing a car include:

• No trade-in or resale risk – At the end of your leasing contract you simply return your car, meaning that there is no trade-in or resale risk. Companies such as Ariva said: “We assume full responsibility for the vehicle’s trade-in valuation risk as well as the hassle of disposal.”
• Shorter contract terms - Mahoney stated that lease contracts are typically structured for shorter terms, 36 to 48 months, while a vehicle finance contract, as stated above, are done over 72 months, depending on the buyer’s affordability. Ariva, a car and vehicle leasing solutions company, highlighted: “Our contract period is shorter than the average traditional finance since research has shown that the majority of clients trade their vehicles in for a new model before the end of their finance term.”
• New vehicle more often – Mahoney also advised that leasing is often a good option for people looking to consistently drive newer cars.
• More affordable installments – It may cost less to lease a new car over a short period of time, than it would cost to buy the same car and trade it in.
• No depreciation risk - Unlike financing, there no depreciation risk when leasing a car, you simply return the vehicle and the trade-in and valuation risk lies with the company you leased it from. Ariva stated: “All cars depreciate, some more than others. Research has shown that after five years your vehicle will (on average) be worth 35% to 45% of the original retail price.”
• Services/ Maintenance are included - "Dependent on how the lease is structured, insurance and maintenance can be included in the deal",said Mahoney. If you purchased your car, unless it comes with a service plan, you will be liable for maintenance costs along with insurance and items such as tyres and licensing. “With us, most of your service and/or maintenance needs are provided for, for the full duration of your lease contract,” stated Ariva. They also offer 24/7 road assistance benefit at no extra cost.
• Fixed monthly deposit - Depending on your lease agreement, the monthly payments on a car lease may be significantly less than those you would have incurred had you financed a loan on the same vehicle, especially true when interest rates are high.

Mahoney highlighted the following disadvantages:

• Mileage limitation - Lease agreements put a limit on annual mileage and any amount over will incur penalties.
• Penalties on early termination - There are penalties for early termination of the contract.
• No ownership –The motorist will not own the vehicle at the end of the lease term.

In conclusion

Leasing a car will serve you well if you only intend on owning a vehicle for a short time, as it would cost less than it would to purchase the same vehicle and trade it in. Leasing would be a great option for people who are consistently looking to drive newer cars.

However, it is important to remember that you will at no time have ownership of the car and at the end of the leasing agreement the car will be returned.

Handy tip: You can apply for vehicle finance on Justmoney, click here.