5 Things You Should Know About Rent To Buy Car Schemes

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kingr
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5 Things You Should Know About Rent To Buy Car Schemes

Post by kingr »

Rent to own or rent to buy car schemes have a long-established presence in South Africa but have risen in popularity over the years. Expats and foreign contractors have taken to the rent to buy car option, as difficulty accessing finance has them paying exorbitant rental fees. Some rent to own car companies even offering specific deals for individuals to establish their Uber businesses with cars registered with Uber beforehand. However, that popularity has come under increasing scrutiny. South Africans feeling the pinch of current economic conditions are finding car ownership schemes, that don't close the door on consumers who are blacklisted, don't qualify for traditional finance or lack the necessary credit score, more attractive. The double-edged sword of not having a strict regulatory environment - while it affords South Africans who are out-of-pocket a more affordable means of car ownership, it does leave them more vulnerable to more predatory rent-to-own car networks.

How is rent to buy cars different from traditional hire purchase and what makes them attractive? Are rent to own vehicles really that affordable and are they safe? If you're looking at rent to own cars as a potential option, here are five things you should know about rent to buy car schemes.

Introduction:

Blacklisted? Low credit score? Naturally, the rent to own car option is targeted towards the lower-income groups or the part-time employed, but recently the industry has started to market themselves towards foreign contractors and entrepreneurs. Foreign contractors and expats have difficulty accessing finance and credit due to the regulatory requirements enforced on financial service and credit providers. This leaves them with limited options for car ownership.

Additionally, rent-to-own car dealers are offering specialised options for individuals looking to establish their own network of Uber drivers with pre-registered Uber cars. A scheme that, unlike traditional hire purchase, allows you to terminate the contract at any time. An attractive and affordable option for car buyers that puts you on the road quickly.

However, the rent to buy industry has faced a great deal of controversy. In 2017 the British financial watchdog, the FCA, slapped the U.K.'s biggest rent-to-own retailer Bright House with an R275 million compensation order after it revealed reckless and predatory lending habits. The FCA noted that there is a trend among companies in the rent to own industry to take advantage of low-income consumers with few options for high-priced necessities. Another concern found was that the majority of consumers who turned to rent to buy options experienced some degree of late payment, in which case many faced repossession of their goods. The U.K. has since introduced reform in the sector with at least some legal recourse for affected consumers.

In local news, the brief history of Satinsky Group's rent to buy car scheme - the "Drive-a-new-car-for-R699-a-month" sticker that was on every i10 on the road in 2015 - has brought similar concerns for South African regulators. The National Credit Act and Consumer Protection Act is unclear without looking at specific contracts and rent to buy agreements. The avenues of recourse and protection for the consumer, in the case of repossession as an example, are limited as opposed to more traditional car buying methods.

Take note that rent to buy contracts and their obligations differ among dealers. Just to clarify, a rent to buy contract is legal. However, the Credit Ombudsman and the National Debt Advisors have all pointed out that it's incredibly important to read the fine print and fully understand the rent to buy contract before signing it. With that being said, here are five essential things you should know about rent to buy schemes.

1) What are the requirements?

It's hard to establish a standardised list of requirements for rent to buy car contracts as they differ among dealers, but generally, rent to buy cars will require the prospective buyer to;
  • Have South African driver's license.
  • Be a South African citizen (not always a requirement).
  • Have a minimum monthly income, with some dealers requiring R8,500 to R10,000 per month.
  • Proof of address.
  • Able to pay a minimum deposit, with dealers ranging from R3,500 to R16,000 required.
  • Proof of income.
The requirement to be a South African citizen is not applied for a large amount of rent to buy dealers, and there is an option for foreign nationals. Foreign nationals may have to pay a more substantial monthly fee for some time, usually six months, before moving on to the local rates. The immediate benefit of having next-to-nothing paperwork to submit is the incredibly quick time it takes from submitting your application to getting behind the wheel. From the approval process to the point of delivery, rent to buy dealers average 3 to 10 working days.

2) You can terminate the contract at any time, without penalty - technically.

One of the main attractive features of the rent to buy schemes, compared to traditional contracts, is the option to terminate the contract at any time. You're not bound to the agreement on a fixed term, and more importantly, there usually isn't a penalty clause like most lease contracts. For example, if you've diligently paid in full each month and decided to cancel the contract 3 or 6 months before the contract's conclusion, you won't be penalised and forced to pay the remaining monthly fees. Again, this is generally the case among rent to buy car dealers but not all dealers, so it's incredibly important to read over the contract.

For consumers on financially unstable ground and part-time workers, the flexibility to cancel the contract at any time and not be penalised is massively appealing.

However, you are penalised in a sense. Usually, the rent to buy contract will require a large deposit to act as security. Upon voluntary early termination of the contract, the consumer will lose the deposit along with the monthly fees paid, up until the date of termination, towards the vehicle. If you take into account that the majority of rent to own consumers have returned (voluntarily and due to payment non-compliance) goods well before their contract's conclusion, they've in effect paid an exorbitant rental fee. For example, an advertised 2015 Chevrolet Spark with 93 000km on the clock will require a R10,000 deposit with monthly payments of R3750 spread over 48 months. If you're hit with financial woes and decide to terminate the contract after 6-months, you've paid R32,500 towards a car that you could've hired at Avis on a long-term lease for the same period for less.

While you may not be penalised in the strict sense of the word if you terminate your rent to buy contract early, the impact of the actual cost of exercising this option will be more than if you didn't apply it.

3) High Mileage and Capped Mileage:

Rent to own cars and buying ex-rental cars share two common characteristics, they're usually cheap, for a lot of the same reasons, and come with high mileage. But one thing that they don't share is a mileage cap. Rent to buy car dealers usually cap the mileage you can do on "your" car in which you'll pay per kilometre. Much like a cellphone contract, once you go over your limit, you pay out-of-bundle rates.

Information remains scant on the exact cost per kilometre and mileage caps. The limit varies from the acceptable to the ludicrous, with some popular rent to buy car dealers capping the mileage to 200 km. That's less than 10km a day, which is barely a grocery run at the local supermarket down the road. If you commute to work, say from Pretoria to Johannesburg, which is roughly 60 km one-way, you can see how those costs will add up. If you're thinking about driving to Mozambique in December, you'll be in breach of contract, as your confined to travel only within the borders of South Africa

However, most rent-to-own car dealers are flexible and have specialised offers to cater to specific needs. So for the individual that spends most of his day on the road, a mileage cap may not be applied.

4) Insurance, Licensing, and Maintenance Plans:

Another attractive feature of the rent to own car scheme is the tedious process of licensing, and insuring the car has been done for you. Additionally, most rent to buy cars come with a maintenance plan built into the monthly fee's and with newer models, a manufacturer's warranty. Rent to purchase car dealers are also flexible and come with roadworthy tests already done, with many cars having the option to opt-out of the additions. Rent to buy cars also come with a tracker installed already. While I don't think it's primarily for your reassurance, it still gives you peace of mind.

It's incredibly important to read exactly what the provided insurance and maintenance plans cover, as any damages or repairs may be on your account. It would be advisable to do a VIN check to get the full information of the car and see if any prior accident repair work has been done before you sign the contract.

5) Late Payment:

Probably the most significant concern surrounding the rent to buy car schemes is the area around payment non-compliance, or late payment, and repossession.

According to the NDA, "As the borrower, you are not protected by the NCA. Furthermore, as soon as you default and neglect to make payments, the rent to own company can and will repossess the car."

Furthermore, as the car is unsecured, it will not be protected if you enter into debt review. There is also limited information or clarification surrounding grace periods for the consumer and recourse before repossession. As opposed to a traditional NCA regulated credit provider, repossession of an asset by the lender can only take place under court order, and provisions must be provided for the consumer. Many rent-to-own companies have reportedly repossessed vehicles seven days after default, which is concerning.

Tip: Many consumers overlook a crucial factor when it comes to accessing their monthly rental costs for rent-to-buy cars, the period of payment. While your monthly fees may be low, the total amount of monthly payments on top of a potential milage cap could mean that you're paying way more than the car's actual value. Also, be aware that some rent to buy companies stipulate that buying out the vehicle early on the outstanding balance will come with an additional fee on top.

Summary:

Rent to buy car schemes have provided an affordable way for car buyers to enter the market and their increased popularity over the years is no surprise. But the lack of consumer protection means you should treat the option with caution. For the entrepreneurial-minded, rent to buy car dealers are offering specialised deals for establishing your network of Uber drivers with pre-licensed Uber approved cars.

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Re: 5 Things You Should Know About Rent To Buy Car Schemes

Post by Yakuza Racer »

A good read!
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