Many options when buying vehicles

Macaulay Motors business manager Craig Hall says buyers need to be aware of the features of all the purchasing and payment options.

13-08-2007 | Gerard Hall

Buy now, pay later or lengthy interest-free periods are among the many options in the marketplace to encourage people to buy big ticket items.

Whether it is new fridge-freezer, a new 42-inch plasma screen to get a better view of the All Blacks regaining the World Cup later in the year or watching our Silver Ferns netball team repel the Aussies in November's World Champs, or a new Ford four wheel drive (4WD) or Mazda BT-50 it all sounds too good to be true. Especially for those whose parents always said cash is king and you seldom get something for nothing.

While there is nothing wrong with offers such as these, it suggests the interest or the opportunity cost of the capital has been either built into the retail price somewhere along the line, or the product is being subsidised by the manufacturer to boost demand and move the product through the checkout.

Over the years there have been changes in the way motor vehicles are purchased, mainly due to the opportunity cost involved in having capital tied up.

Now, when it comes to buying a new motor vehicle, as well as paying cash, there are offers such as one third, one third, one third, plus a range of leasing and finance options among the myriad of purchasing and payment options.

Nowadays it is becoming more common, especially in large fleets, to employ a mix of ownership options and avoid having huge sums of money tied up in vehicles.

. Before buying a new 4WD vehicle or the new family car, Macaulay Motors business manager Craig Hall says buyers need to be aware of the features of all the purchasing ands payment options.

Hall does this day in and day out in his role at Macaulay Motors Invercargill. Serving the Southland public for more than 70 years and now also in Queenstown, the longstanding Invercargill motor vehicle dealership company holds a dual franchise for Ford and Mazda.

However ask Hall what he prefers to drive and all you will get is a wry smile.

His role involves working with customers after they have linked themselves to the vehicle they want, discussing with them their preferred purchase option and ensuring the package they decide upon is right for them.

There is more to a car yard than selling cars nowadays, he says. Hall's role does not involve selling vehicles, rather it is focused on ensuring the highest level of customer service and retention.

"It is this rapport with the customer that generates the loyalty and ensures the repeat business, a customer for life," Hall says.

Over the years there have been changes in how motor vehicles are purchased and vehicle fleets managed. As well as paying cash, use is being made of finance options, operating leases and leasing to own options.

While the circumstances of each individual situation will vary, to avoid tying up capital in vehicles it is becoming increasingly common, especially in large fleets, to see methods other than just paying the cash up front. Quite often a mix of options is used within the one fleet.

Hall says when tailoring a package for a client, Macaulay Motors has seven finance companies to choose from, enabling contracts to be built around the clients needs.

These may include matching payments with seasonal income patterns, and building in flexibility to repay lumps sums even when rates are fixed.

The term of a finance contract varies from one month to 60 months and the level of the deposit is generally negotiable. Payment options are flexible and can be weekly, fortnightly, monthly, and bi-monthly. They can also be tailored to fit with the pattern of seasonal cash flows.

Under the provisions of the Credit Contracts Act, with a finance option the vehicle is owned by the purchaser from the outset. The applicable GST component of the vehicle's purchase price can be claimed in full at the beginning of the contract period for business vehicles.

Using the vehicle as the security may be a good option if a purchaser does not wish to use other forms of equity such as property.

Finance leases that include a balloon payment option are also popular. A balloon payment is an estimate of what the vehicle might be worth (residual value) at the end of the agreement. The residual value can either be guaranteed or not guaranteed. This form of lease offers lower monthly payments, and the ability to repay the final balloon payment at anytime during the term of the contract. Monthly payments still have to be made.

Hall suggests a conservative approach when determining the amount of the final balloon payment. This allows for the fluctuations that do occur in the used car market. This is particularly important if the intention is to buy the vehicle at the end of the agreement or use it as a trade-in.

Lease to own, also commonly referred to as finance leases or lease to buy, involves a commitment to lease the vehicle for a pre-determined term. The lessee then pays an agreed residual sum at the end of the term to own the vehicle.

Actual residual values differ depending on the type of the vehicle, mileage and its condition.

Using the example of a $15,000 residual value, the vehicle can either be bought outright at the end of the lease term for a cash payment of the $15, 000, sold outright back to the dealer, or used as a trade-in for another vehicle.

One attraction of this option is monthly payments can be reduced by putting down a cash deposit or using a trade-in. There is also a degree of flexibility when setting the actual residual payment from the outset.

Hall says with lease-to-own there are no set kilometres, nor kilometre penalties, and the vehicle lessee is responsible for paying the residual at the end of the term.

Though well maintained 4WD vehicles are currently holding their values well compared to some other makes and models, Hall does suggests erring on the conservative side when setting the residual payment in the contract.

With lease to own, no interest is charged on the GST, and GST can be claimed in the period the monthly installment is paid.

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