Question:
I need a new car and although I do not have a company car, I get paid extra for using my car for business from time to time. I have a large home bond and can?t afford to spend a lot on a vehicle. My friend suggested that I buy a car on a residual because the repayments are lower. What is a residual lease and is it a good idea?

Answer
Residual leases were originally designed by banks to help out farmers.

In the old days, the farmer's income was determined by the size and frequency of his crops. If he needed a new tractor before his crop was harvested the bank would do a deal whereby only part of the vehicle was financed right away and a percentage was left payable at the end of a pre-determined period, usually after the crops had been harvested and the farmer was flush.

Here's how residual values work.

If you bought a car that costs R200 000 and you financed it over 48 months, at the end of the period you would owe nothing. If you bought a car with a residual value of, say, 30 percent, then the bank will charge you interest on the full amount. However you would not be required you to pay back the 30 percent of the capital until the end of the lease. So after 48 months, you would still owe R60 000. You need to be confident the sale of your car will be enough to cover this amount.

Buying a car on a residual lease is the most expensive way to do it. The bigger the residual, the more risk you take that the car will sell for enough to cover the outstanding amount to the bank. Many people end up paying money in to get rid of a car, especially if they have not looked after it or the car has high mileage, which reduces the resale value.