Many people who enter the market for their first car can be overwhelmed by the countless financing options available. While almost every car buyer can apply for a vehicle loan, not everyone has the same credit history. In light of the ongoing economic troubles across the country, car buyers are finding it more difficult to secure funding for a brand-new car. Blacklisted or under-debt-review consumers are especially drawing the short straw when it comes to loan approval.
An emerging financing trend that appeals to those lacking a sufficient or recent enough credit history is the “rent-to-own” model of ownership. “In South Africa, the rent-to-own scheme is being touted as a way for people to enter the vehicle buyer’s market, with many purchasing taxis, work and private vehicles through such agreements,” states an article in IOL News.
Access to the latest car models. This is the biggest lure of rent-to-own schemes. Car Insurance, roadside assistance and a tracking system are often part of the deal. Dealers also promote second-hand cars with high number of miles on it which could otherwise be sold at auction. They sell these vehicles for at least a 100% mark-up, usually twice the auction price, and calculate the rental price on this markup.
The advantage of rent-to-own cars is that they come with better approval odds. These applicants are usually not subjected to a credit check. They need only submit their identity document, payslip and proof of residence. This makes it easier to be accepted for a deal. Click here for an example of requirements of a South African rent-to-own company.
As the above example shows, buyers put down a deposit and then make payments on a weekly monthly basis. They rent the car for an agreed period, usually 24, 36, 48 or 60 months with an option to switch to a newer model after the term ends. While they’re in possession of the vehicle, they are responsible for maintenance and all running costs.
The implications of rent-to-own car schemes
Rent-to-own deals can seem like a good option in that it’s easier for applicants to get approval. But consumers need to consider whether it’s the right funding structure for them. Two of the issues that can catch them off guard are defaulting and possession.
What happens if low income consumers can’t afford payments anymore? IOL News highlights the fact that the industry has failed to introduce a standard way to calculate customer arrears and repossessions. This raises the question if lenders adhere to traditional credit guidelines.
Section 127 of the National Credit Act, gives consumers the option to voluntarily surrender their vehicle. The credit provider must repossess a vehicle from a consumer if they have a court order that authorises them to do this.
“Before you rush out to look for your new car or workhorse, be warned that rent-to-own is not the consumer’s friend: you’re paying far more for the goods, the interest rate is astronomical, and many such companies target the financially vulnerable consumer. The longer the contract, the more you’re going to pay. It’s convenience at a huge cost,” says Avitha Nofal, a legal adviser at the Credit Ombudsman’s office.
Before signing on the dotted line, you can make sure you are prepared with these eight steps
- Determine how much you’ll be paying for the vehicle in the end and compare it with the price of buying a vehicle directly from a dealer.
- What is included in the Car Insurance policy and what will you pay in excess? Will you receive third-party cover as well?
- Are you allowed to sign-up for a Car Insurance policy at your preferred insurance provider? Keep in mind that you may not get a reduced instalment if you switch.
- How old is the vehicle? If it has high mileage, does it include a maintenance plan?
- Who is responsible if the vehicle breaks down and must it be taken to their approved workshop?
- Will you be charged late payment fees? Can you ask for an extension or make arrangements to pay an instalment later?
- Are you able to repay early and, if so, does an early settlement penalty apply or will you receive a discount?
- Do you really need a new car now or is it something you want? Remember if it’s not an emergency, you can always save up to buy a car later.
It’s important that car buyers are informed about decisions regarding their personal finances. If the rent-to-own structure sounds like the quickest road to vehicle ownership, consumers are encouraged to take the time educating themselves about what they are committing to before buying a car.