Many people end up in financial difficulties. A vehicle is an expensive item, but what are the options when you are in need of a vehicle, but you do not qualify for credit? You might be under Debt Review, insolvent or just over indebted. Who do you approach?
"Rent-to-Own" or "Rent-to-Buy" Vehicle Business Model
This model of ownership dates back to the 1960 when people purchased appliances when they could not otherwise obtain credit. However, with the recent financial climate in South Africa, more and more second hand car dealers offer this type of vehicle purchase option to those who really cannot afford it, in an attempt to make a vehicle affordable. So, before you sign up to "rent" a vehicle from someone, be fully aware of the pitfalls.
Some of the companies, who focus on this business model, draw the consumer's attention with advertisements applicable to the consumer's tarnished credit history, such as "under Debt Review", "Insolvent", under "Administration" and "No Credit Checks, to name but a few. Be warned of being lured into a rental agreement if you are already struggling financially.
An Affordable Option to Buy?
Vehicles rented out on this business model for a monthly payment, normally comes with a high deposit, attractive monthly repayment, inclusive of tracker, service, licensing and other maintenance offers, to name but a few, without the kilometers being capped as one of the highly recognizable "perks". Some companies do offer an opt-out option for consumers who cannot continue to afford the monthly rental. However, not all of these companies offer this method, which can cost you a fortune.
Some companies will repo the vehicle, the consumer to forfeit the deposit, and still sue the consumer for the outstanding term of the rental agreement, all the while, whilst this company is in perfect position to use the same vehicle in a new transaction. Nothing prohibits the company to do so once you have signed the agreement and fails to defend yourself against enrichment in a Court.
Excellent Business Model to be Repeated
One cannot help but ask why would some companies who specialize in this type of Business Model, offer a vehicle to someone who is already either over indebted, or under Debt Review or insolvent without doing a credit check?
It is very simple. It is a highly profitable business model, for some. Firstly, because it is a "rental" agreement, it is not deemed as credit provided in terms of the National Credit Act. Secondly, the chances of a consumer defaulting on the rental agreement is very high.
One would ask "but why would a company want a consumer to default? It does not make sense?" Well it actually does! Once a consumer defaults and the agreement makes provision in such circumstances for the consumer to lose his/her initial deposit, the vehicle is being repossessed, and can be sold for a second round on the same profitable business model. This is thus a highly scalable and repeatable business model!
Say for instance the client cannot obtain credit, for what ever reason, and is interested in a vehicle, for argument sake a 2006 model, at an advertised Market value of R 70 000. It is likely that the company will offer this vehicle to the client at a deposit of R 15 000 - R 20 000 and an inclusive monthly "rental" over 60 months of R 5 000, totaling the "rent-to-own" or "rent-to-buy" vehicle price over 60 months, plus deposit of R 15 000 at R315 000! This for an old vehicle of which the last "rental" payment normally suffice as the "purchase price". The only "upside" to this is the fact that it does include some "costs" such as "no limit" or capping on kilometers and sometimes services.
Effect of Unaffordability After Some Months Have Passed
If, for some reason, after three or four months, the consumer cannot afford to continue with this agreement, the agreement will be cancelled and in most circumstances, the vehicle repossessed if not tendered back and the deposit forfeited. Some of these companies actually do not offer relief and will still issue summons against such a consumer for the remainder of the rental agreement.
Liability If No Relief is Offered, Be WARNED!
If you find yourself in the unlucky position where you can no longer afford your "rent-to-buy" or "rent-to-own" vehicle, and the agreement you have signed does not offer relief in terms of the remainder of the agreement term, you will be held liable for all monies still due and payable on the remainder of the term, despite the fact that you will not be in possession of the vehicle. If you are already in this position where you cannot afford to pay the rent, it is highly unlikely that you will be able to afford legal representation, and a default judgement will be entered against you. Next, the Sheriff will knock on your door writing up whatever assets you still have left!
Accrued New Debt When No Relief In Agreement Offered!!
For argument sake, lets accept that the first six months went smooth, but from month seven onwards this agreement is no longer affordable and you have paid R 15 000 deposit for a 2006 vehicle, already 13 years old and valued by the dealer at R 70 000, you will accrue a debt of R 270 000 for a vehicle you no longer rent, nor has any claim to, after you have paid R 45 000 (deposit and rent). A mere nine months after signing the "rent-to-buy" or "rent-to-own" agreement, this vehicle could have been bought cash, by saving another three monthly rent payments!
Are All "Rent-to-Own" or "Rent-to-Buy" Agreements so Hazardous?
No, some companies do not pursue you if you can no longer afford to rent in terms of the initial agreement. Some companies will offer you a down grade or an opt-out option. However, you will most likely forfeit your deposit, but you will not be held liable for the remainder of the rental agreement.
Read The Agreement Before Entering Into!
The most important piece of advice any person can receive before entering into an agreement, is to read each and every clause thereof. There is a saying that "the Devil is in the detail or in the fine print", and this really proofs to be true.
Therefore, before you enter into any of these agreements when you are already in debt and cannot afford to accrue more, please ask legal advice to ensure that your rights are protected. It is far more affordable to pay an attorney a consultation fee to peruse an agreement, than to pay off a debt you really should never have incurred at all.
You can contact
DPB Attorneys / Conveyancers
on www. futuraedpb.com for specialized advise on NCA and Debt related matters.