Chance For Buyers To Get Smart
The Age
Wednesday October 26, 1994
Outright ownership of new cars may soon be a thing of the past, writes Bill Tuckey, as new forms of financing make it possible to pay for just what you use.
THE BEST way to buy a new car today is have a two-year test drive and pay the deposit at the end. If this sounds like pie-in-the-sky country, it's not. It's simply part of a new approach by the car makers, dealers and finance companies to the process of putting bums into seats. And it's just the start. Not far around the corner - maybe less than half a year away - is a buy/drive concept in which people use a credit card to rack up points for discounts on a new car.
Such things have been through a couple of years of market testing, mainly in Britain and North America. There they have worked so well that almost one-third of new car purchases are done with this new form of credit. Australia has been slower off the mark, because here the consumer perception of the need to ``own" equity in a house, a car or similar, has been much stronger than overseas, where rental or leasing has long been accepted.
Mazda Australia is probably a good cross-section example of how Australians buy cars, because its range spans most age and income groups and its cars have a deserved reputation for holding resale value.
Its latest survey found that 51per cent of buyers pay cash, 17per cent lease, 17per cent use loan funds, 12per cent buy on hire purchase, and there are 3per cent ``other". The high cash figure, Mazda explains, is because many of its buyers are able to use lines of credit or loans that put together houses, cars and other purchases which would go through the dealer in the form of a cash payment.
But the first real move to try to wean Australian new car buyers off HP was made by Holden when, just under a year ago, it quietly introduced SmartBuy. Its marketers decided it had to work with its finance arm, General Motors Acceptance Corporation (GMAC), to develop other ways to finance a new car purchase. The problem was that Australia's car population was far older than in most countries, and though we were soon to emerge from a recession, Japanese yen inflation meant people saw new cars as too expensive.
What they came up with was a modified form of ``balloon financing".
In essence it's a mini-lease for a private buyer, with a set residual at the end and a guaranteed buy-back. This is the way it works: You go into a Holden dealer, pick the car you want, and with the dealer and GMAC work out the period of ``lease" - from two to five years, depending on the monthly payments you want to make - and the residual figure at the end.
No deposit is needed. The residual figure is subtracted from the on- the-road price agreed to, and then you finance what's left. In other words, you're paying only for what you use over two or more years. At the end, you can pay out the lump sump (or ``balloon") residual figure, which is very like paying your deposit at the other end.
Or you can simply hand the car back to the dealer and walk away. Or you can elect to take what equity you have in the car over the residual figure and put that into a new car - rolling it over, if you like. You can even sell the car privately, not only at the end but during the lease period, as long as you pay out the fixed residual all parties agreed to at the start.
Nobody loses. You pay only for the amount of car you use. Because you want to make sure it can be resold for more than the residual, thus making a small profit (but watch capital gains tax there) you look after the car well, so the dealer gets back good quality used stock - the most desired thing in the trade. You're also more likely to keep the car with the dealer and his service workshop for the life of the lease, so he makes his profit margin on parts and service.
Another plus for the customer is that it's possible to keep turning over a new car and stay within the warranty, so there are no extra running costs. Many warranties are for three years/100,000 kilometres, and sources say it won't be long before Holden moves from two to three years as well.
This week Ford finally followed suit and formally unveiled its Red Carpet Options program. While the principles are the same as SmartBuy, in that it's a mini-lease with agreed residual and buy-back, guaranteed by the Ford credit arm, it does require a deposit. Its advantage is that it drops monthly payments well below those of HP, even though interest rates are the same at a stiff 14.5per cent (current commercial vehicle lease rates are 10-11per cent).
When the customer makes the decision, the Ford Credit computer supplies the estimate of the car's value in two years' time. This becomes the buy-back price, and the same disposal options are available as with SmartBuy. Examples given by Ford are a Festiva at $16,800 and a Falcon GLi auto at $27,638 (both prices including on- road costs).
After a 10per cent deposit of $1680, the Festiva buyer is financing $15,120. Over four years of HP monthly payments would be $416.98; over two years of Options they are $353.46 and at the end the residual is $10,572. With the Falcon, the similar figures are a deposit of $2764, HP payments of $685.98 a month, Options payments of $560.74, residual of $18,241.
The downside is that this is not the cheapest money around. Personal loans are running at lower interest rates, as are business loans and overdrafts. Generally, you're paying up to 3per cent more for the privilege of a guaranteed buy-back and not having to worry about haggling over a trade-in price on a successor.
By now, most people will have woken up to the cupidity of those bank television commercials suggesting you can roll a car (or boat or swimming pool or whatever) in with your house mortgage, or if you have some equity in your house, use it as a guarantee for buying a car. If they haven't been alerted by now, this week's 1per cent rise in the prime interest rate should have done it for them.
In the end, there is no such thing as a free lunch, and you're far better off paying cash. But if you can't, and if your old car is starting to cost silly money to keep running, then SmartBuy may be the smartest way to go.
© 1994 The Age