The latest buzzword in the local automotive industry right now is “car subscriptions”. Although the concept itself is not new, it is relatively new to South Africa, being offered locally by companies such as Flex Club and Drivve. 

What is a Car Subscription? 

Well, think about subscribing to your favourite music streaming service, for example Spotify. When you subscribe to Spotify, the songs aren’t yours, you’re paying to listen to them. It’s the same for a car subscription. You get a car- commitment-free where there’s no long-term contract to follow and you get the flexibility to switch cars when the need arises. 

In Spotfiy terms, you’ve listened to Billy Joel to the death and now want to move onto Styx. Your friends begin to make fun of your old fashioned music choices, so you change to Drake. Technically, you could do the same with a car subscription, choosing the economical Suzuki S-presso for you daily commute to work, swapping it for a Toyota Fortuner for your Kruger trip in July, and then for a Mercedes C-Class to impress your work colleagues. 

Car subscription services are a hybrid between short-term rentals and long-term leases. Think about car rental with a bit more freedom and a bit more flexibility. When renting, if your needs suddenly change, you won’t be able to terminate your contract without incurring a penalty. You’ll be stuck with the contract that you first signed, for however long that was agreed upon. With car subscriptions you can terminate or pause your subscription at any given time. 

Is there a market for this? It seems that car subscription providers are not targeting the rental market but rather would-be car buyers. Let’s have a look at pro’s and con’s, in general, of car subscription vs ownership. 

Advantages Of Car Subscriptions 

1. No Contract 

You won’t be bound by a long-term contract that ties you down. You can cancel the subscription anytime you want with no penalty or fees, giving you the flexibility and freedom that’s not common with traditional car ownership. 

2. No Downpayment 

Car subscriptions don’t require you to fork out a heavy downpayment. You’ll have the freedom to spend your money wiser and on the better things in life. 

3. No Loans 

As a car subscription only requires a monthly fee, there won’t be a need for you to take up a long-term car loan which ties you down and forces you to make a commitment early on. 

4. Do Away with Depreciation 

Escape the hidden cost of car depreciation that affects and decreases the value of your car throughout your ownership journey. 

5. Difficulties of Selling your Car 

Avoid the hassle of selling your car and the trouble of getting the best price for it when you decide to sell your car. 

6. External Influence 

As a car subscriber, you don’t need to worry about external factors affecting the value of your car. Things like the fluctuating insurance premiums won’t affect the price of your car. 

7. Change Cars Every Month 

Freedom to drive different cars every month. So if you get bored, you can try a Volkswagen Golf or even upgrade your plan for more premium rides. It also gives you the flexibility to change cars when your needs change. Which means that if you suddenly need more space, you can seamlessly switch to an SUV. 

8. All-inclusive Fees 

The convenience of all-inclusive fees that covers your maintenance, insurance, road tax and roadside assistance. All you need to worry about is your parking and fuel charges. 

9. Hassles of Owning a Car 

When you have your own car, you need to take care of all the hassle behind car ownership. From maintenance to insurance and even road tax, there’s a lot of things to keep track of and pay. Subscribing to a car eliminates these hassles, we’ll handle every little detail for you. 

10. Customer Support 

With 24/7 customer support at your beck and call, you’ll get extra assurance that help will always be around whenever you need it. 

Disadvantages Of Car Subscriptions 

1. High Monthly Fees 

Some people might feel that the monthly fees are a bit high. The monthly fee is almost the same as buying your own car. However, people tend to forget that the monthly fees are all-inclusive and cover almost everything you will need throughout your journey. 

2. Higher End Models = More Money 

The cost of subscribing to a car increases with the different type of car models you choose. If you choose a high-end car, the costs can add up to a point that it outweighs the benefits of subscriptions. 

3. Subject to Availability 

Even though you can choose almost any car you want, there are still some limitations on the availability of cars and the models that the company offers. 

4. Mileage Cap 

An annual mileage cap might put off some customers. However, there’s the option for drivers to upgrade or tweak their mileage at a reasonable price. 

5. No Modifications etc. 

With car subscriptions, you do not own the car. You’re simply paying for the right to use the car. As such, you are not allowed to do most types of modifications to the car. 

The case for car subscriptions in South Africa – how it works vs traditional financing 

The following excerpts have been taken from Business Tech

“In 2020, the average price of a new car in South Africa was R321,715, way beyond the budget of the average wage earner without the use of vehicle finance. 

The total cost of car ownership is, of course, much higher than this figure suggests – once maintenance, insurance and fuel are factored in, the average new car owner carries a total cost of over R8,000/month, escalating yearly. 

As more and more consumers buckle under the pressure of debt, new business models are cropping up that are poised to disrupt conventional car buying. The car subscription model is one of them. 

The negative equity trap 

Few understand the complexity of vehicle financing or how this multi-billion-rand product manages to remain the dominant driver of car sales in markets like South Africa. 

To understand the shortcomings of car loans, we must understand how they work and the role they play in the market. 

One of the core strategies of the auto loan industry is to lock consumers into longer contracts to transfer more risk to the customers and maintain the perception of affordability through lower monthly repayments. 

It has become increasingly common for South Africans to take six-year car loans to keep up with rising car prices – although most new car buyers never keep a car for much longer than three years. 

While longer repayment terms appeal at face value, they saddle consumers with negative equity for longer. 

Negative equity is the state one enters when the amount owed to the bank exceeds the value of the car, making it impossible to part ways with one’s car without a large additional payment to the bank. 

Higher interest rates, longer loan terms and bigger balloon payments are all factors that can expand negative equity, keeping most car buyers trapped with a perennial debt burden. 

The car sales process makes it worse. The negative equity trap is exacerbated by the information asymmetry embedded in the car buying process. 

The typical car buyer knows far less than the dealer about how the car will depreciate, what the optimal financing structure for the car should be and what it will cost to keep the car operational during the loan term. 

Consumers carry all the risks, while the industry benefits from the unrestrained promotion of precarious car loan terms alongside the sale of the car. Car dealers are 

well incentivised to perpetuate this distribution model heavily reliant on the sale of car loans. 

Once consumers are ready to commit to buying a car, the common practice is to progress the customer to the “Finance & Insurance” leg of the transaction, where the dealers earn most of their money selling car loans and other insurance products. 

It’s a no-win situation for many car buyers, who often submit to egregious car loan terms that can overburden them with large balloon payment obligations. 

Ill-prepared consumers buying cars in this way should expect to be driven into unfavourable financial positions, particularly if they don’t plan to keep the car for more than six years. 

The standard loan terms used in car ads today (usually hidden in the fine print) clearly validates the industry-wide strategy to lure consumers into financing over 6-years with a 35% or higher balloon payment.” 

In Summary 

Typically, when you wanted a new set of wheels, you had two options: 

1. You could finance a new, certified pre-owned or used vehicle. Or 

2. You could pay cash without the trouble of a loan when purchasing a new, certified pre-owned or used vehicle. 

Now there is Option 3 - You can sign up for a car subscription service. 

Car subscription services are a hybrid between short-term rentals and long-term leases, making it possible for customers to subscribe to a temporary car “ownership” without any long-term commitment and a convenient all-inclusive monthly fee. 

The car subscription model’s strength is its incredible flexibility and diversity of vehicle brands, with a host of vehicle providers able to easily launch all-inclusive subscription offers, giving it broad appeal. 

Only you can decide whether it makes financial sense or not, and perhaps the starting point is to ask yourself how long you intend keeping the vehicle. 

If you planning to keep your vehicle for 6 or more years, then vehicle financing remains a good product. If you one of the Cuban Engineers in South Africa for a year, car subscriptions may be the better option, offering flexibility, simplicity and ease of access without the sense of encumbrance so common to ownership via debt or as a result of carrying the risk of theft, damage and maintenance.