Leasing a vehicle is no longer a taboo, but does it work for you?
Buying a car is better than leasing unless you plan to move cities or like to upgrade often
Other than renting a house, the traditional mindset has always been to purchase. And for big ticket possessions like a car, the purchase is accompanied by a lot of fanfare and pride. But enter millennial India and the concept of purchase has taken a back seat, and renting or leasing is the new normal.
The concept of leasing is here to stay—the increasing number of start-ups that help you rent nearly everything under the sun are testimony to this—and it is fast catching up even when it comes to vehicles. It started with corporate leasing initially for senior executives in multinational companies, being practised by luxury carmakers. But it has slowly become the norm in corporate India and the concept is now going retail with companies such as Mahindra and Mahindra offering some of their models on lease directly to customers.
“In today’s world, mobility is the key and this transformation is rapid. Next gen demand is coming from ride hailing companies like Ola and Uber and car sharing companies like Hertz and Autolib. Car leasing companies like Avis too are adding up to this demand. Car manufacturers understand this well; so you may see multiple car manufacturers entering this business model,” said Gaurav Vangaal, senior analyst, vehicle production forecasting, IHS Markit, a global information provider. So if you are considering leasing a car instead of buying it, we tell you what works and what doesn’t.
How leasing works
Leasing allows you to drive a car without actually buying it or paying a huge sum. When you lease a car, you only have to pay regular monthly instalments for as long as you keep the car. These instalments include the cost of the vehicle, insurance, maintenance, applicable taxes and other recurring costs. Generally, there is no down payment involved. There are two kinds of leasing models—finance leases and operating leases. Corporate leasing usually follows the operating lease model which requires you to either return the car to the lessor or purchase it at the prevailing market value at the end of the lease tenure. The finance lease model transfers the ownership of the car to your name at the end of the tenure. “Not many people choose to buy the car at the end of the tenure as people prefer going for a new model or an upgrade unless there’s an emotional attachment with it,” said Sunil Gupta, managing director and chief executive officer, Avis India, a car rental firm. What attracts most salaried people towards leasing is the fact that it gives a tax benefit of up to 30% as you can claim the entire rental as an expense.
According to Gupta, the car leasing market in India is currently worth ₹1,500 crore and is set to grow at 15-20% CAGR over the next ten years. “About 40% of our business comes from leasing vehicles,” said Gupta. “The biggest advantage of leasing is, you get to drive the car in its most trouble-free years,” said Varun Krishna, certified financial planner, International Money Matters. And that’s what caught the fancy as people today like changing cars frequently.
Lease versus loan
According to estimates by Avis India, if you lease a car worth ₹12, 85,000 for a period of four years, you shell out ₹30,887 every month as lease payment which includes maintenance, insurance and recurring expenses. At the end of the four years, you would’ve spent ₹14,58,659. But leasing means you get a tax benefit of up to 30%, which is nearly ₹4, 45,000 over the course of four years. Thus, your total expenditure is ₹10,37,803. However, if you buy the car by availing a loan for the same time period, you’d spend ₹32,027 every month as EMI including an interest of 9.5%. At the end of four years, you would’ve spent ₹15,37,281. In this case, your net savings when you opt for lease over loan is ₹4,99,478. The numbers favour leasing but remember this doesn’t factor in the fact that you have to pay an additional amount—the prevailing market rate—if you wish to keep the car. It also doesn’t factor in the resale value of the car, because if the resale value of the car is higher than the money saved on leasing, then buying becomes a better option, otherwise not.
“Lease works out cheaper because you get tax benefit as well. Apart from repaying the loan EMIs, you also have to pay regularly for the maintenance, insurance and what not if you buy a car. The biggest differential is the upfront down payment which can be avoided if you lease,” said Piyush Khatri, founder, Sahastha Financial Consultants.
Though you get to own the car and keep it for however long you wish, there are a lot of other charges you’ll have to bear including taxes, insurance premiums, maintenance costs, and registration fees which are all inclusive if you lease. Also, taxes on the purchase of a new car include GST ranging between 18-28% plus cess between 15-22% depending on the classification of your vehicle (size and type of engine) and an additional road tax based on the vehicle pricing which varies from state to state. However, operating lease includes all applicable taxes.
Leasing will make sense if the resale value of the car you buy is lower than the money saved on leasing. Also, buying the car will be a better option if it is bought on complete cash down and not on loan.
Pitfalls of leasing
Since leasing involves a commitment for at least 2-4 years, it may not work for you if your work or lifestyle demands you frequently move from one city to another because most leasing companies do not allow transport of vehicles. Another pitfall of leasing is that most companies put a cap on the number of kilometres you can drive and in most cases, if you request the lessor to enhance the driving limit, it could come at a higher cost. Also, if you are someone who likes modifying your car by adding additional accessories, leasing may not give you that freedom unless you request the lessor to make these changes.
Mint money take
Aspirational Indians want to upgrade their cars every 2-3 years for the latest models but new cars lose upwards of 20% of the value as soon as it is driven out of the showroom. With emission norms and rules on phasing out old diesel and petrol vehicles in cities like Delhi, getting a good resale value after 7-10 years is difficult.
Some people today don’t have the time and patience to keep a check on regular maintenance of their vehicles, insurance renewals and other responsibilities that come with owning a car, and lease makes sense for such buyers. But if you are looking for ownership, long-term value, and the freedom to modify and keep the car for however long you wish, then buying the car is your best option. If you are someone who likes to change cars often then leasing is for you. But remember, you have to return the car at the end of the tenure. So if you are sure you want to keep it, you can check with the lessor and buy it at the prevailing market price. However, right now you may have limited options as retail leasing is still in its nascent stage in India.
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