Do you dream of owning the perfect home or exchanging your old, loud car with a better, more luxurious model?
Did you know that the average purchase price of a car in South Africa is roughly R315 000 at the moment — how can everyone afford to buy cars that cost so much?
For buyers who need time to accumulate a deposit or to establish a healthy credit history, a rent-to-buy agreement could be the most viable way to buy a car.
Let’s take a deeper dive to understand how rent-to-buy works in South Africa and whether it’s the better option for you!
Rent- to-own, or rent-to-buy, is a leasing agreement that allows tenants to rent a property for an agreed period of time and offer them the option to purchase at the end of that period.
The agreement provides buyers with a great opportunity to “buy a home” without substantial upfront costs, which is an excellent option for those who cannot save a deposit and secure traditional financing.
This type of lease can be applied to two things: Houses and cars. The main outcome might be the same, but there are a few differences in these agreements that you need to be aware of before you make a step.
Let’s take a look at each type.
It could also be a great way to buy a car while under debt review.
Buying a home or a car can be done using either a rent-to-buy program or financing. Despite their many similarities, there are numerous ways in which they can be confused.
So, here is how you can tell the difference:
Rent-to-buy: When you enter into a rent-to-buy agreement, you agree to rent the property or vehicle for a specified period of time until you are able to make the purchase (either with cash or a loan from a bank). Once the contract is fulfilled, ownership is transferred.
Financing: On the other hand, as part of an owner-financed deal, the seller provides you with a loan, which is paid back in monthly instalments.
Rent-to-buy: Since you are a tenant until the payment is completed, a rent-to-buy seller maintains ownership rights and responsibilities, including repairs.
Financing: In an owner financing situation, ownership is transferred at the outset. As a result, you assume all ownership and repair obligations for the home/vehicle.
Rent-to-buy: Unlike traditional leases, rent-to-buy agreements do not give you the option of selling the car or house to avoid foreclosure. Furthermore, if a rent-to-own agreement falls into default, deposits are not refundable.
Financing: In owner-financed agreements, you have the freedom to sell to counter default.
These deals carry a risk for both buyer and seller, but renting-to-own can make sense if the deal is structured properly and is done for the right reasons.
If you have low credit scores or unpaid debt, rent-to-buy houses or cars will give you the time you need to work toward improving your credit rating before you need to apply for a mortgage or buy the car fully.
So please, consider this option only if you are certain that your financial situation is soon to be improved and your credit history is improving, and you’ll soon have a good credit rating to finish the purchase with more favourable terms.
If you are interested in rent-to-buy a house but are still trying to decide where to settle down, then it is important to mention that this option is best avoided.
Also, before you sign the contract, make sure you have done your homework by reading and re-reading the lease, researching the seller, asking the right questions, choosing the right terms, and lastly, never hesitating to ask for help to avoid any issues.
Rent-to-buy programs have made it possible for potential buyers who lack the money or credit score to obtain a loan to take steps toward owning a house or a car.
Although this approach surely has its benefits, it has its drawbacks, and can be risky. That is why having a plan of action in place before signing a rent-to-buy agreement is vital to ensure that it is the right option for you.
Find out if you’re eligible to reduce your debt and protect your belongings.
Disclaimer: This website and any information herein is not intended to be, nor does it constitute, financial, tax, legal, investment, credit, or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified professional directly.