The Buy-back Option
Sydney Morning Herald
Wednesday April 30, 1997
Is car leasing the best way to keep up with the latest? Or is the consumer getting "nothing for nothing"? It depends who you ask, writes MARK LAWSON .
CARS age fast. Today's hot model can look dated in three years, ancient in five and may have trouble with the annual registration inspections in 10.
But in the past, ordinary consumers had to continue driving the same lease car long after its showroom shine had worn off, or fill in a lot of papers before being allowed to switch to a new model.
Now car-leasing packages called guaranteed buy-back leases, which allow consumers to upgrade car models in less than an hour at the end of a two- or three-year lease period, have become widely available.
Just how popular they are is debated by the various players in the market (see story below) but undoubtedly the number of packages has exploded over the past two years.
Besides the market pioneers who began offering packages two years ago - Ford, with its Red Carpet Options package, Holden (SmartBuy) and Esanda (Flexidrive) - other groups now doing so include Toyota and Mitsubishi (in conjunction with other financiers), St George Bank, CBFC and AGC.
Guaranteed buy-back leases are not for every car buyer.
Giuseppe Toscan, national manager wholesale finance for the Commonwealth Bank financing arm, CBFC Ltd, notes that CBFC's Flexicar guaranteed buy-back package is for new cars.
His company might consider financing a used car less than a year old, say a demonstration model with few kilometres on the clock, but otherwise would consider only new cars.
Jane Winnall, senior product manager for Holden's SmartBuy product, says there are three distinct types of buyers. There are the "savvy" buyers who know a great deal about how the financing works and there are the "professional" buyers who arrange a SmartBuy deal perhaps as part of a salary package. These two groups tend to buy Commodores.
Then there are the younger buyers, usually sons or daughters of the professionals who were attracted to the idea of owning a new Barina or Astra, with full warranty and a 24-hour roadside service, for about $69 a week, she says.
A spokesman for Ford Finance says no particular model is favoured by users of the Red Carpet Options, but they are less likely to lease top-range Fairlanes and LTDs.
The basic features of a guaranteed buy-back package do not vary. They are for two- or three-year periods and include a figure usually known as a Guaranteed Minimum Future Value (GMFV) - the price the financier thinks the car will be worth at the end of the lease period. In an example given by Westpac financing arm Australian Guarantee Corporation at the Herald's request (see table below), an automatic Ford Falcon Futura with a present recommended retail price of $33,388 has a guaranteed price of $17,361.76, or 52 per cent of the original purchase price after three years.
At the end of the lease period, the consumer has three options:
* Hand back the car. If it's in good condition and under the agreed kilometres, the lease is considered settled and the consumer can walk away or, more probably, switch to the latest model for about the same monthly payment - although the switch may involve finding another deposit. This flexibility has made guaranteed buy-backs popular overseas (see sidebar).
* Pay out or refinance the residual. The financier may agree to an ordinary personal loan to pay off the balance.
* Sell the car on the used-car market, if prices there are better than the guaranteed price, then pay out the agreed price and pocket the difference.
Consumers should shop around, but they should also compare guaranteed buy-backs with the mainstay of the car market, an ordinary loan.
Leasing is another form of lending. Instead of borrowing the money to buy a car, the consumer is borrowing the car, but that still means the consumer is being lent the equivalent of the car's retail price.
The monthly payments on the AGC SureDrive package, to use the AGC example, are then equivalent to the interest on the purchase price plus a repayment of the difference between the new and guaranteed price after three years.
SureDrive users pay $718.40 a month to drive a Falcon Futura, as opposed to $1,106.24 a month for a personal loan to do so, but at the end of the lease period are left with nothing.
A spokesman for the consumer magazine Choice said the bottom line on guaranteed buy-backs was that the consumer got "nothing for nothing".
"All you get is some degree of certainty about the resale value - you will get at least this much for your car at the end of the lease," he said. "There was a certain amount of convenience associated with the packages but I can't see you would be better off financially."
HOLDEN SMARTBUY
Typical buy-back packages
Barina Commodore
Retail price $14,490 $32,090
Deposit none $6,400
Contract term 36 months 36 months
Guaranteed buy-back price $8,259.30 $19,224
Monthly payments $301.97 $425.42
Weekly payments $69.97 $98.17
Rate 12.5% 12.5%
Allowed kilometres 40,000 kms 70,000 kms
SmartBuy includes a disposal fee of $350 if the car is handed back. There may be
an extra charge for excessive wear and tear, and prices quoted do not include
dealer and statutory charges (including stamp duty).
AGC - SUREDRIVE VS LOAN
1997 Ford Falcon Futura (auto)
SureDrive Ordinary Loan
Retail price $33,388 $33,388
Contract term 35 months 36 months
Buy-back price $17,361.76 loan paid out
Monthly payments $718.40 $1,106.24
Rate 11.7% 11.7%
Allowed kilometres 70,000 kms N/A
These figures do not include dealer or statutory charges. The buy-back price
counts as the 36th payment in the SureDrive package, or the consumer can hand
the vehicle back.
© 1997 Sydney Morning Herald
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