Most vehicles are depreciating assets, meaning that their value decreases over time. In the face of rising inflation, consumers are taking this seriously and considering alternatives to traditional car ownership.
We take a closer look at the reasons for this shift, and we consider three alternatives to car ownership that are rapidly growing in popularity.
Tip: If car ownership seems the optimal option for you, make sure you secure the best insurance deal.
A shift in thinking
Tinashe Ruzane, CEO and co-founder at FlexClub, says that consumers are changing the way they think about mobility and car ownership.
“Twenty years ago, most people thought that owning a car was a natural step in the journey up the economic ladder. However, across the globe, more people are ditching the long-term debt that car finance represents, in preference for more flexible vehicle access products,” says Ruzane.
It’s increasingly apparent, he says, that cars are not a great way to build financial wealth. The lump sums of cash they demand have a high opportunity cost.
“Instead, consumers are embracing the idea that, unlike property, which is an appreciating asset, cars are better treated as an ongoing monthly expense.”
The downsides of car financing
Ruzane notes that certain attributes attached to vehicle financing are increasingly hazardous to the financial well-being of many consumers. These factors are causing disruption in the car loan sector.
“The most precarious features of auto loans in South Africa are their long durations and, in some cases, high residual payments – also known as balloon payments. The latter creates the illusion of affordability through lower monthly instalments,” he says.
It’s become increasingly common for South Africans to take six-year car loans with a 35% balloon payment to keep up with rising car prices, Ruzane notes. This is counterintuitive as most new car buyers don’t keep a car for much longer than three years.
“A balloon payment may make your car seem more affordable, but it guarantees that the balance of your loan will be higher than the value of your car for several years,” says Ruzane.
Financial experts call this negative equity, Ruzane says. In other words, you destroy financial value in the short term. A good rule of thumb is that if you can’t afford a car without the balloon payment, it’s too expensive for you.
“Although longer loan terms seem appealing at face value, they saddle consumers with negative equity for longer. Negative equity makes it impossible to part ways with the car without a large additional payment to settle the loan,” says Ruzane.
Higher interest rates contribute further to negative equity, keeping most car buyers trapped with a perennial debt burden.
What are the alternatives?
Ruzane believes that consumers will continue to move away from car ownership, and he points out the following alternatives.
- Ride-hailing
Ride-hailing services, such as Uber and Bolt, offer both convenience and money-saving benefits. Parking fees, fuel, insurance, and maintenance are among the costs avoided.
These services have grown exponentially over a short period, and they are an increasingly common solution for those who travel less than 1,000 kilometres per month.
The downside is the lack of control these options represent compared to driving your own car, especially when services take a long time to arrive or the driver seems less than savoury.
In addition, the money-saving benefit is all but negated past the point of 1,000 kilometres in mileage each month. Ride-hailing can then become significantly more expensive than having your own car.
- Car subscriptions
Car subscriptions are also growing in demand. A range of providers, such as Avis, Europcar, and FlexClub offer contracts that range from month-to-month to 12 or 24 months.
Subscriptions typically include 3,000 kilometres per month of hassle-free driving – although some providers may offer more mileage packages at different price points. Subscriptions remove the need for additional maintenance and insurance costs, as long as the vehicle is used responsibly.
The downside is that if you’re looking to keep the same car for more than three years, this may not be the best option for you. It’s well suited to those who don’t want the hassle of car ownership but want a car they can drive exclusively.
- Car sharing
Car-sharing applications are popping up across the world, enabling customers to make use of a car from just a few minutes to several days.
The cars are parked at convenient locations and registered customers can simply unlock the cars using the car-sharing app.
The challenge with car sharing is vehicle availability. Customers can easily find themselves stuck when all the cars in the area are in use, and may have to walk long distances to find an available car.
It’s very expensive for car-sharing providers to build a sufficient density of cars to create reliability. Many car-sharing apps have failed due to their inability to balance fleet size and fleet utilisation.
If you are using your own car, make sure you save on insurance by regularly comparing quotes.