What is pri­vate leas­ing?

Sunday World - - Business -

“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

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