What is private leasing?
“PRIVATE leasing ” has come to the fore since the introduction of the National Credit Act (NCA).
Previously, you had to have a car allowance or use your vehicle for business purposes to structure finance agreements in the most affordable manner.
The introduction of the act has meant that any individual can now structure their finance agreement in a way that suits them best.
Repayment periods have been extended, deposits are negotiable and balloon payments or residual values can be used to make vehicle financing as affordable as possible.
While both residual values and balloon payments make your credit agreement more affordable, they also differ greatly in their levels of risk.
Residual values versus balloon payments
There has always been confusion around these two phrases. Many people believe that they are the same. Although this is not the case, they both bring down your repayment, making it more affordable for you to finance a vehicle.
The difference between the two is the risk at the end of the agreement period.
A balloon payment is a payment you make to the bank to settle the outstanding debt on the agreement.
The full risk is therefore placed on you. The final payment is your responsibility.
A residual value is different. The risk of this “final payment ” is passed on to the bank that financed your vehicle purchase and it becomes responsible for the balance of the outstanding debt.
You have the benefit of lower repayments throughout the term of the contract and are not liable for a balloon payment at the end of the agreement period.
You simply hand the asset back to the bank, enter into a new credit agreement on another vehicle and off you go.
How is this beneficial?
Many customers rely on their ability to make the balloon payment at the end of their agreement by “trading in ” their vehicles.
But what often happens is that the value of the vehicle does not match the outstanding debt you owe to the bank.
You then have to pay in the difference, which can be an expensive exercise.
A residual value eliminates this depreciation risk and you are simply required to hand the vehicle back to the bank.
You may then enter into a new finance agreement on another vehicle.
For more information, visit www.standardbank.co.za