Understanding Rent-to-Buy Vehicle Finance

Sep 12, 2023 | Finance & Refinancing

It seems like such an American concept – to rent-to-buy a vehicle – but this approach to owning a car has grown traction in South Africa. For some, it’s a far better financial approach to buying a car than the traditional vehicle finance route.

Here’s a closer look at what it means to rent-to-buy, the reasons why this is a popular choice among many South Africans, as well as the risks you should be aware of before you make your decision.

The Rent-To-Buy Approach

Simply put, this is a type of vehicle financing which allows you to make monthly payments towards the purchase of a car. It’s very similar to taking out a loan in that sense. However, with this style of finance, you are merely renting the car with the option to buy it at the end, or possibly even during the contract period itself.

Essentially, it’s a type of leasing agreement, where you either buy the car at the end of the contract or you move to the next car you want to lease… or you walk away and pursue another means of buying a car altogether.

The Way It Works

On a more practical note, the way the rent-to-buy option works is that you’ll typically pay an initial instalment to the provider. The actual amount depends on your agreement, but by and large, it’s usually 10% of the total cost of the car. It could be that there is no instalment required, but this depends on the provider.

Following this instalment, you’ll make your monthly payments over a set period of time, although again, this detail would be something that’s specific to the terms of your contract. This timeframe could be anything from two to four years, or maybe longer.

And then, as mentioned, at the end of the ‘lease period,’ you can either pay the outstanding amount that would make the cars yours, or you can return it and head off on your merry way.

Why Rent-To-Buy Is Becoming Popular

Let’s talk about why more people are looking at this vehicle financing option in South Africa. Right off the bat, this option allows you to have a car without necessarily having to put down a large deposit, making this an affordable way to get your own set of wheels without the need for a loan or to have a lot of cash upfront.

This brings us to those who are struggling to buy a car because of their credit score. Let’s say you’ve gone through a tough time and this is reflected in your credit score, making it harder for you to secure vehicle finance. With the rent-to-buy option, you have a way to get a car and to build up your credit score by meeting your payments.

Here are a few other benefits to consider:

  • Most rent-to-own providers lease the latest models.
  • Dealerships often include basic insurance, roadside assistance, and a tracking subscription into a packaged deal.
  • It’s a great way to drive a used car that’s in “like-new” condition.
  • Many rent-to-own deals allow you to upgrade your car after 18 months.

What You Should Keep In Mind

There are a few things that you need to be aware of when it comes to this kind of financing arrangement, such as the fact that rent-to-buy monthly payments are generally a bit higher than what you’d pay if you take out the standard vehicle finance loan. There may also be extra fees, like security deposits.

There are those rent-to-buy companies who target financially vulnerable people with the lure of a new car, only to hit them with incredibly high payment plans. Failure to pay means that you lose all deposits and are in an even worse position than before. You need to be careful who you use in this regard.

It’s also worth noting that there could also be an early termination fee in your contract if you decide to buy the car before the end of your contract. There may even be an annual mileage restriction that you would need to adhere to.

One disadvantage of a rent-to-buy contract, you may have to pay end-of-term fees or even a lump sum before you can fully own the car. If you do not have the money to pay this fee or lump sum, you may lose the car that you have been making payments on for several months or even years.

These kind of details are included in the terms and conditions of the contract, so it’s important that you read these documents very carefully before you sign on the dotted line.

Feel informed?

It’s true that rent-to-own car financing deals can be a good way for you to enter the car-buying market if you have a bad or no credit history. But this is only the case if the deal is fair and makes sense for your personal financial situation.

It’s with information like the above that you can do your due diligence and make an informed decision that will ensure you’re not wasting your money.

Not sure what your credit score is? Get a free credit report.

Remember, AA Inform is here to help you with research you can trust, tools that can help, and advice that will shed light on tricky decisions.

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