This article was first published in the second-quarter 2015 edition of Personal Finance magazine.
Personal experience confirms that there is something deeply satisfying about paying the final instalment on your car. Aside from having a few grand more in your pocket every month, the thought that you are no longer in the thrall of the bank triggers a distinct frisson.
Enjoy it while it lasts, because, if you are like most people, you’ll return to the bank’s embrace almost immediately. (Hey, we all need wheels, and banks are not inherently evil.) Before you sign the next car finance contract, however, you need to ask yourself a few questions. Do you plan to keep the car until it dies of old age? Would you choose bling over resale value? Are you in the habit of buying your car via a 60- or 72-month credit contract (perhaps with a balloon payment waiting at the end), then becoming impatient and upgrading after only 36 months?
If the last one sounds familiar, you are exactly the sort of customer being targeted by specialist private vehicle-leasing firm Ariva, a joint venture between Imperial Holdings and Merchant West, an independent investment holding company and financial services provider. Although Ariva is only one of many players in the leasing sector, it’s no slouch when it comes to punting the advantages of full maintenance leasing over credit instalment sales for individuals.
Managing director Keith Watson reckons vehicle ownership is overrated, citing the relatively high percentage of consumers who sell or trade in their cars after 36 to 40 months – well before the end of the instalment-contract term, which generally runs to five or six years. In truth, he maintains, these people are effectively leasing. “The only real difference is that they take on the additional costs associated with car ownership, as well as the vehicle depreciation risks.”
As a “true” private-leasing company, Ariva takes on the RV (residual value, or balloon payment) risk, Watson says. “Our customers have the option of paying the RV and taking ownership, exactly as they would with instalment credit finance. However, they can also return the vehicle to us in good condition and we take on the risk of the RV.”
Drags on consumer affordability and lower credit approval rates – particularly in the entry-level and mid-tier market segments – have led to sluggish growth in the automotive sector, he says. “However, people still need transport. I believe private leasing will gain more widespread acceptance and begin competing in the mainstream market with traditional financing products such as the instalment sale.”
This may be so, but it is a fact that a significant percentage of private buyers still prefer to take ownership of the car once it is paid off. They may pass it on – perhaps to a spouse or newly graduated offspring – or keep it in the family “fleet”, because they see no point in giving up a vehicle that has been serviced regularly and will probably keep going for another 100 000 kilometres at minimal expense.
Many others prefer to use the car as a trade-in to cover the deposit on a new model, effectively relinquishing the “old” vehicle as an asset. Ariva hopes to change this habit by persuading motorists that leasing makes more sense, arguing that paying an all-inclusive sum for your personal transport – not to mention the satisfaction of acquiring a shiny new model every few years – far outweighs any negatives.
Ariva offers two packages, dubbed Lite and Premium, on terms ranging from 36 to 60 months. The Lite version (a so-called operational lease) includes comprehensive insurance, a service plan, vehicle-tracking and roadside assistance; the Premium package adds one set of tyres and full maintenance, arranged in association with the firm Liquid Capital (for details, visit www.liquidcapital.co.za).
The tracking unit, installed free of charge, delivers a vehicle-recovery benefit in the event of it being stolen, as well as an accident alert function. Tracking fees are included in your payment.
Ariva’s business development manager, Chelsea Swartz, explains how it works: “The monthly payment is fixed and paid in arrears throughout the chosen term. You have the option of placing a residual value (balloon payment) of up to 30 percent on your chosen vehicle, which will significantly lower your monthly instalments. At the end of the term, you can either hand the vehicle back to Ariva – in which case the residual value falls away – or pay the residual and take ownership.”
Ariva also allows you the option of upgrading or downgrading your vehicle after 18 months, subject to credit approval. You are not liable for the residual in either case, Swartz says, adding: “You also have the option of paying a non-refundable deposit if you wish to reduce your monthly instalments.”
Ariva offers leases on new and used vehicles. For a used vehicle, the car should be less than two years old, with fewer than 55 000 kilometres on the clock.
What if something goes wrong – that is, your leased car is stolen or involved in an accident? That’s when things could get expensive. Ariva will not provide a free rental car while your damaged vehicle is languishing in the panel shop, although it does offer a “payment holiday” if the repairs take longer than 21 days. Your insurance excess in the event of an accident is R5 000. If the vehicle is stolen, the amount increases to R10 000.
According to a source in the motor finance industry, this underscores what appears to be a significant disadvantage of Ariva’s leasing model: the customer has to accept all the bundled extras – comprehensive insurance, vehicle-tracking, and so on – and loses the option of negotiating his or her own insurance and other expenses.
“Because the leasing company owns the vehicle’s residual value, it needs to manage its asset very well, and it does that by layering in all these extras and ending up with a rather hefty monthly bill. Thereafter, it controls customer behaviour by specifying serious penalties for deviations from the agreement,” the source says.
Watson sees things differently. “Because we are part of the industry, we have a range of dealers and manufacturers through which we are able to dispose of the vehicle, allowing us to take on a little more RV risk. As a bulk buyer, we manage to source our service and maintenance products at good prices.
“When it comes to comprehensive insurance, which is compulsory no matter where you finance your car, again we have bulk-buying power and the potential to secure a better insurance rate than can be sourced individually. The same applies to the tracking unit fitted to each vehicle. Ultimately, the sum of all the parts could, and often does, end up being cash-flow-friendly.”
Even if Ariva’s product matches the basket of costs that the consumer could source individually, Watson says, “there is still the added benefit that we take the vehicle depreciation risk – in other words, the RV – so it really is peace of mind from beginning to end”.
In some respects, Ariva’s Premium product resembles the full maintenance lease deals that financial institutions such as Wesbank and Absa have been offering for years. Some corporates go for this option because it makes the accounting simple, says a motor industry insider, but it has yet to win over individual buyers. “In all cases, the shorter the lease period, the higher the monthly payment, because most of the vehicle’s depreciation occurs in the first year.”
It is clear, although no one would say it on the record, that the sense in the industry is that the economic climate in South Africa is not yet conducive to the leasing model offered by Ariva. However, one insider who wanted to remain nameless said Ariva had much to gain from it. “This is a clever move by Ariva,” she said. “With Imperial’s backing, they will be able to push their own franchised vehicle brands and integrate their own maintenance and insurance products.”
She has a point. Imperial owns South Africa’s largest network of franchised vehicle dealerships, and these function as distribution channels for the group’s financial services, insurance, vehicle-servicing and parts businesses. At present, Ariva’s range of brands includes Chery, Daihatsu, Ford, General Motors, Hyundai, Kia, Mazda, Nissan, Proton, Renault, Tata, Toyota and Volkswagen, with more promised for the near future.
Choices, choices
Interestingly, my inquiries about individual vehicle-leasing at seven branded motor dealerships elicited mild puzzlement, and in every case, sales staff referred me to the firm’s financial manager – which suggests that the option is not yet making waves in the showrooms.
One manager, in particular, did not hesitate when asked about the choice between instalment sales and leases: “Forget about leases for the individual buyer,” she said firmly. “Instalment credit remains the only sensible option.”
It seems that ownership is a goal few people are ready to relinquish, and many people may not be aware of the purchase option at the end of a lease.
Nevertheless, there were hints of interest elsewhere. Derek Leach, the general manager of sales and marketing at Toyota Financial Services, said his company was researching vehicle purchase and ownership trends with a view to offering private-buyer lease or instalment-sale products with a minimum guaranteed future value (GFV) – in other words, you’ll know how much your Toyota will be worth at the end of the agreement. If you decide to return the vehicle at that point, Toyota Financial Services will cough up the agreed GFV against your final balloon payment.
The benefit of a lease or instalment credit transaction with a GFV is that the customer has options at the end of the period, according to Leach. These are:
* Return the vehicle and don’t make a final balloon payment.
* Make a final balloon payment, or finance this as an instalment credit transaction. With this option, you own the vehicle after the balloon payment.
* Trade in the vehicle for a new one, and if you are able to realise a better trade-in value than the amount of the final balloon payment, you can use the surplus as a deposit on a new vehicle, thereby reducing the monthly payment on your next lease or instalment credit transaction.
Whereas most of Toyota’s private buyers opted for a 60- or 72-month instalment credit transaction, Leach said, the average agreement was settled between months 36 and 40, when customers found they were in a position to trade in the vehicle for a new Toyota and the proceeds of the trade-in value were sufficient to settle their existing lease or instalment credit account. “In many cases, these customers realise a surplus, because the vehicle is in good condition and has been well maintained.”
Do your sums
My advice? If you’ve decided on the car you want and are considering a lease, sit down and tabulate the full cost of your transport over the proposed lease period, taking into account how you’ll be using the vehicle (annual mileage) and whether you are likely to keep it afterwards (potential resale value), making a note of all contractual obligations, penalties and perks.
Ask yourself whether you want an operational lease (where the monthly payments are about the same as the instalment credit variety) or the full-maintenance version, where everything is taken care of but you pay considerably more each month, and you do not automatically own the car at the end. Then do the same with the instalment credit option, not forgetting to factor in comprehensive insurance, and ask the salesperson about maintenance options that could be tacked on to the contract. Remember that most mechanical failures tend to occur after the first two or three years (that is, unless you’re in the habit of driving 60 000 kilometres in a year).
Finally, have a word with your tax consultant: if you’re self-employed, the deductions applicable to a lease might be useful. But taxation is too personal to generalise about, so, as with all aspects of personal finance, check it out relative to your individual circumstances.
* Visit www.financecalculator.co.za
THE NUTS AND BOLTS OF LEASING
When you lease a new car, you commit to monthly payments (call it rental, if you like) that cover the leasing company’s finance charges and profit margin (and, in Ariva’s case, add-ons, such as insurance and vehicle-tracking). In effect, you’re paying for the depreciation of the vehicle while you’re using it. Not surprisingly, you will incur a penalty if you decide to terminate the agreement before the agreed date: Ariva bills you 20 percent on all remaining instalments, irrespective of the lease period.
At the end of the lease, which may include a balloon payment, you have the option of handing the car back (in which case no balloon is payable) or buying it as a used car. You can lease a vehicle for however long you like, but remember that the shorter the period, the higher the monthly payments, because the bulk of the depreciation occurs in the first year. Your monthly payment is determined, among other things, by the number of kilometres you expect to travel each month. If you exceed the figure specified in the contract, the leasing company levies an excess charge per kilometre.
In fact, you will be charged at the end of the lease for anything that decreases the car’s resale value, and this could mean scratches and dents, “abnormal” wear and tear (weekend drag-racers take note), unauthorised customising (those alloy wheels may look cool, but not from the finance perspective) and excessive mileage (that is, more than the contracted annual mileage). It is imperative that you are realistic about the last estimate, because if you get it badly wrong, you could end up with a large bill at the end of the lease period.
Whether you acquire your vehicle through a lease or an instalment plan, you remain responsible for regular servicing according to the manufacturer’s instructions. If you slip up, you risk voiding the warranty (and you would certainly be violating your lease agreement).
It’s also worth noting that some cars come with maintenance plans included in the instalment contract: the Mercedes-Benz Premium Drive product, for example, offers “complete peace of mind motoring” for the first 100 000 kilometres or six years, whichever occurs first. It costs you nothing for the first 100 000 kilometres. In such a case, Ariva says, the plan is taken into account when calculating your monthly lease payment.
SHORT-TERM LEASING
Know someone who needs a car for six to 12 months? SA Motor Lease (http://samotorlease.co.za) targets “expats” (overseas visitors who live in South Africa temporarily) who may want a new, reliable vehicle for a relatively short period, without the “stringent requirements” that banks have for conventional motor vehicle finance. At the same time, it offers customers the opportunity to buy their leased vehicles at the end of the contract period if they so wish.
The idea is simple: “You contact us and let us know what vehicle you are looking for, and for how long. We will then buy the vehicle and lease it to you on a monthly basis.” The company offers contracts as short as six months, but a typical lease is nine to 12 months. Monthly instalments are fixed, so unaffected by interest rate increases, and include comprehensive insurance, roadside assistance and an accident management fee. As an example, you could acquire an entry-level Polo Vivo 1.4 or Toyota Corolla Impact by paying a (refundable) deposit of R10 000 and a monthly rental of R4 950, which includes maintenance costs.