Perils of cashing in on your car
Plan may offer quick fix but ultimately leave you worse off
If you're cash-strapped and need a lump sum in a hurry, you may be able to sell your car and then lease it back for less than what it would cost you to hire a car. When your finances improve, you can buy back your car for the amount you sold it for.
DriveAwaySA's offering is timely, with many people facing a reduced income as a result of the lockdown. And it will be especially appealing to consumers with impaired credit reports, because it's not a loan and therefore doesn't require credit checks or regular repayments.
DriveAwaySA will give you the proceeds of the sale of your car "immediately", whereas when you apply for a loan from the bank you have to go through the administrative process and wait for approval before getting access to the funds, "which would take longer than the 24 to 48 hours it takes to receive the cash from DriveAwaySA," the company says.
The price that DriveAwaySA will pay you for your car is based on the trade-in value of the vehicle.
To qualify for the offering, you need to own your car outright; the vehicle needs to be a 2005 model or newer and have done less than 250,000km; the cash amount extended to you needs to be R40,000 or more; and you need to cover any costs required to get the car roadworthy.
These costs can be added to the first month's lease as a one-off payment.
You won't have to insure the car, but you will be responsible for servicing it.
You can return the car at any stage, as there are no rental tie-in periods.
DriveAwaySA CEO Mayran Spiro says the only administrative costs involved are an upfront origination fee of R2,500, which covers fixed costs, the inspection of the car, the roadworthy inspection, licensing and a tracking unit.
If you buy back the car, there is a R1,500 fee for the re-registration and relicensing of the vehicle in your name.
Spiro says there is no limitation on mileage you can do and the tracking device is not used to monitor how you drive.
"The leasing fee is based on the purchase price of the car and, on a like-for-like basis, is cheaper than renting a car from a rental agency. For instance, renting a group A or B vehicle [typically the cheapest rental group] from a car hire company could cost in the region of about R6,000 to R8,000 a month, while renting back your car from DriveAwaySA could be as much as half of that - and you're renting a vehicle you know and have experience with."
Spiro says it is best to use DriveAwaySA as a short-term funding solution. Over the longterm it will become more expensive than a bank loan, he says.
However, although it's a good idea to sell unwanted or unused assets such as an extra vehicle that's only used occasionally,
financial planner Brendan Dunn says that to sell and lease back your own transport at a premium presents a great deal of risk.
Dunn says you have to guard against ending up in a worse position than when you started - with the money from the sale of the car spent, without a car, unable to afford to lease the car and unable to buy it back.
He suggests you divide the proposed purchase price by the proposed monthly lease amount. "This will give you the number of months until the vehicle effectively starts costing you money, and the point at which you should consider buying it back."
He suggests you check your credit report because if you can't buy the car back in cash, you'll have to finance it. The banks will consider your credit score and the age and state of the vehicle.
"It will also mean that you may have financed the vehicle twice as well as rented it in the interim. This can make it a very expensive endeavour indeed," he says.
Dunn says it's important to get a valuation for your vehicle from dealerships and to assess how much you may need your car in future. If the way you work has become fully remote, you may not need your car half as much as you did, he says.
You may be better off selling your car and waiting a few months before buying a
cheaper one, he says. Consider what a replacement vehicle will cost you in monthly repayments and compare this to the DriveAwaySA offer, Dunn says.
"The monthly lease amount is likely to be steep. The company will charge you a
premium [profit margin] that will ensure they hold all the cards before very long. They give you what the car is worth. You then rent it back from them. Before long this would likely cover their initial payment to you and you would then buy it back from them.
"If you can't afford to buy it back, you continue leasing it and when you can no longer afford it, they can sell it on to someone else. They could therefore receive double (or more) of what the car is worth," Dunn says.
Financial planner Jean Archary says if you decide to sell and lease back your car, you may have exhausted all other options and have little choice.
The advantage of this offering is that you'll be driving your car, which is familiar, she says.
But a lot depends on how long you plan on leasing it, your ability to fund any major repairs, and whether you'd be liable for any excesses, should you have an accident or if the car is stolen.
"It would be important to read the fine print and to consider all options," she says.