Rent-to-Own has become a popular option for financing a vehicle. Although some people take this option because of the flexibility it offers, notably it’s also the only car-financing option available to consumers who have been blacklisted. In this guide, we’ll delve into this type of financing and its pros and cons.
What is rent-to-own car financing?
A rent-to-own (also known as “rent-to-buy”) vehicle finance plan is an agreement through which you can rent/lease a car by paying for it for the duration of a contract term. Most of these agreements require a deposit to get started, the length can vary from 12 to 60 months, and you must pay an agreed premium from the beginning to end of the contract term.
The premiums usually include rental costs, comprehensive insurance, warranties, and a tracking device. They cover a large portion of the purchase price of the vehicle in question.
If you pay your instalments dutifully, the car will become yours at the end of the agreement term. In other words, ownership will be transferred to your name. In most cases, the transfer of ownership requires a pre-agreed “lump sum” to be paid. If the customer does not want to keep the car or does not have the lump sum, then the car can be returned and the customer can move onto another vehicle/contract.
Legally, this kind of agreement is designated as a ‘rental’ rather than vehicle finance, which is a critical difference because the former is not governed by the National Credit Act. This means that the credit and affordability checks that are mandated by the National Credit Act do not need to occur, which opens the door for these deals to be offered to blacklisted consumers.
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The advantages of rent-to-own cars
Flexibility
A car subscription may sound similar to bank finance but there are important differences. Bank finance agreements have much less flexibility, can lock in the customer for as long as 72 months and typically also have high “balloon” payments, which mean that exiting the agreement during the first few years can be very expensive and very difficult.
Car subscriptions are generally more flexible. For instance, some companies ask for a minimum commitment of 6 months, after which time the customer can return the car at any time for a nominal fee. This means that the customer is not liable to pay the shortfall in the car’s realisation value, which the bank would charge to the customer when the bank sells off a car that has been returned to them.
Available to blacklisted customers
To reiterate, a rent-to-own or “lease” agreement sits outside the National Credit Act. This means that the providers do not have to perform the same credit score and affordability checks that are mandated by the Act. This opens the door to blacklisted consumers and this is the main driver of the growth of this market segment.
In Nov 2021, the National Credit Regulator indicated that 40% of consumers are 3 or more months in arrears with one or more credit accounts, which effectively locks them out of the vehicle-finance market. Rent-to-own gives these consumers a feasible path to accessing a vehicle to drive on a day-to-day basis with a path to eventual ownership.
Rent to own providers will ask for your ID, proof of residence and a payslip, as you’ll need to show you can afford the rental payments.
However, it is worth noting that because such agreements are not governed by the National Credit Act, the protections offered within the stipulations of the Act do not apply. More about this later.
Also read: How to buy a car if you are blacklisted
Fully inclusive
Most rent-to-own contracts include comprehensive insurance, a tracking device, a warranty and roadside-assistance cover as part of the deal. It is important to note this when you compare the monthly payments of a Rent-to-Own deal with the instalments of a traditional vehicle-finance agreement, which only services the debt on the vehicle.
Always ask if “maintenance” of the vehicle is included. In general, this will be included but you need to understand what is included and what will be paid out if the vehicle breaks down. You will almost always be using rent-to-own to buy a ‘used’ car so it is important you understand the rules.
The disadvantages of rent-to-own vehicle finance
While “renting a car to own it” has its advantages, before you sign on the dotted line, it’s important that you are aware of the implications.
More expensive than credit options
The “effective” interest rate charged by the rent-to-own company is very high, much higher than in the case of traditional car financing. Remember, they are lending to customers who the credit bureaus regard as “very high risk” and thus the price reflects this risk. If you see the agreement through to its completion and “own” the car outright, you will probably have paid multiple times the purchase price.
Repossessing rent-to-own cars
Rent-to-own contracts are not credit agreements and thus the consumer protection against repossession written into the National Credit Act does not apply. If you fail to pay just one premium, then it is likely that the car will be repossessed with immediate effect. Vehicle finance companies need a court order to take your car. The rent-to-own company will be at your door within days of non-payment.
Is rent-to-own financing for me?
Vehicle Finance is not an option for most South Africans. Rent-to-own provides a genuine alternative.
However, it can be confusing identifying the right finance option for your needs and circumstances. Cars.co.za recognises this and we have created a Finance Section which explains all the various options and terms clearly.
Looking for an alternative? Why not try FlexClub’s pre-paid plans?
