Kms Usage determines the finance period.
Car allowances have appeal to those employees who travel higher than average business travel as this potentially reduces personal tax exposure.
However, it does expose drivers to cost risks that need to be understood and addressed.
The resale value of a used vehicle is determined by vehicle make, age and Kms usage and it is this that should determine the finance method and period.
Employees with sales or field service responsibilities will travel more Kms than average and usage within the 40 – 50,000 Kms pa range are not uncommon. However, what this means is that after 2 years your vehicle could have 100,000 Kms on the clock or 150,000 Kms after 3 years. Most will think about changing their vehicle in the 2 – 3 year period.
Recent experience has shown that this is where serious financial problems arise when there is a large gap between the bank settlement and the market value.
The table below which calculates the Monthly Rental for a vehicle costing R250,000, travelling 50,000Kms pa, financed over a period of 24 – 60 months using a fully paid up or residual value lease at 25% of the purchase price illustrates the potential problem.
As is to be expected the monthly rental drops with a longer period and even further with the use of a Residual value. The temptation is to select a longer period.
In this example we calculate the bank settlement at 30 months and express as a % of original price. To make this meaningful we need to compare settlement to the Kms travelled
Although resale values are a function of usage and condition, which are not known is this example, we can ask some realistic questions. Would you expect to get 57% (R142,500) or even 42% (R105,000) for your 4 year old car with 200,000 Kms? Probably not.
The certainty of selling your car for the bank settlement increases with a reduced finance period, possibly at 42 months without a residual value, but possibly not when a residual value is utilised.
The consequences of not selling a used vehicle at bank settlement, when it has run its useful life are quite serious. You either lose money or continue to use it risking high maintenance costs or loss of reliability.
The only way to address this problem is by selecting a shorter but appropriate finance period or even paying a deposit. Consult with a knowledgeable person for guidance.