Is it better to lease a car or to buy one?
Leasing is convenient, but it's usually more expensive than buying a car on loan
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Buying a car is a decision that involves many factors as it’s an expensive affair. Many readers write in asking how they should save to meet this financial goal. An option that has gained popularity in India recently is for self-employed individuals and professionals who run their own practice to lease a car. Already popular in the corporate world, it is slowly gaining traction among businessowners and professionals as well.
This sector is still maturing, but compared to about 15 years ago, we are seeing many more professionals (doctors, engineers, architects, lawyers and so on) and self-employed people going in for leasing cars. Though we do not see many retail individuals coming to lease cars, we could possibly see a change in mindsets in the next five-six years. At present, however, we do not lease to individuals," said Rahul Maroli, general manager-commercial (sales and marketing), LeasePlan India Pvt. Ltd.
Some of the other companies that offer leasing services include BNP Paribas-owned Arval India Pvt. Ltd, ORIX Auto Infrastructure Services Ltd and Avis India. Car makers such as BMW Motors Pvt. Ltd and Mercedes Benz India Pvt. Ltd, too, have their own leasing services as a part of their financial services arms.
“We have received very encouraging response for our leasing programmes. Private leasers in addition to companies, self-employed and small and medium enterprise owners prefer leasing as it is hassle-free," said Eberhard Kern, managing director and chief executive officer, Mercedes-Benz India.
Let us take a closer look to see how much financial sense is there in leasing a car.
Going in-depth
A lease gives you the right to use a vehicle for a pre-determined tenor and distance against payment of monthly fixed lease rentals. Typically, a lease is for two-five years. There are two kinds of leasing contracts. In operational leasing, all you have to do is buy the fuel; the other details—maintenance, insurance, repairs, and more—are taken care of by the leasing company. Another option is that of financial leasing. With this, you can look at buying the car from the leasing company. “Some of the advantages of leasing are that the leasing company provides a pick and drop to take the car for service, it takes care of damage repairs and so on. All these costs are covered in the lease rental," said Maroli.
The lease will have to be taken in the name of your company. Though there is no downpayment or security deposit, you do have to submit a few documents. Since you will be getting the lease in your company’s name, you will have to submit documents such as financial statements, electricity bills (as proof of address), Memorandum of Association and Article of Association, and so on. These help to assess your company’s creditworthiness.
How leasing scores over an outright purchase is that you do not have to shell out a downpayment or pay for the running of the car. Buying a car means you have to deal with downpayment as an auto loan takes care of only 80-85% of the value of the car. Also, in a lease plan, you do not have to pay for the basic running of the car on a monthly basis; only the fuel.
Lease rental is calculated based on a residual value-based funding. Residual value is the percentage of the on-road cost price of the car, which is deducted from the total cost. Residual value is estimated based on various factors—car model, city of registration, tenor, kilometres, new vehicle launches, and so on. “The two key factors to be kept in mind before choosing the leasing option are the term or period of the lease and the yearly usage—the distance travelled during the year (km per year). Both these factors have a direct implication on the monthly rental. The higher the usage and/or period of lease, the higher will be the monthly rent. So, the customer should understand her usage pattern and accordingly decide the lease," explained Kern.
Doing the math
Leasing may offer convenience, but how does it compare with an auto loan in terms of overall costs? We take two examples to compare. According to the Arval India’s website, it costs ₹ 31,481 a month to lease a Volkswagen Vento (ex-showroom price in Mumbai is ₹ 11.50 lakh). If you were to instead take a car loan of, say, four years from State Bank of India at 10.45%, you would have to pay ₹ 25,004 a month as equated monthly instalment (EMI). So, a four-year lease will cost ₹ 15,110,88; and on a loan, you will end up paying ₹ 13,77,580 (including processing fee of 0.5%, as charged by SBI).
With a smaller car, leasing is could be more economical. For example, you can lease a Hyundai i20 (ex-showroom price in Mumbai is ₹ 8.13 lakh) for ₹ 19,663 a month with Arval India. This works out to ₹ 9,43,824 in four years. On loan, it would cost you ₹ 17,677 in EMI and a total of ₹ 9,73,901 (including processing fee) at the end of the four years.
We have not considered costs such as maintenance and servicing. After a few initial free servicing visits, the rest are chargeable; at least ₹ 2,000 per visit for smaller cars (this will increase as your car ages). When you lease, all these are taken care of by the company as it remains the owner of the vehicle. Also, if your loan tenor is shorter, the EMI will be higher.
However, at the end of a loan, you will own the car and can resell it. It is important to include the resale value of a car in this calculation, especially for smaller cars. With a leased car, of course, resale is not an option. Another disadvantage is that not all cars are available. You will have to check to see what’s on offer. It could also be that the car you want is not available at the location you want.
In a financial lease plan, which is the same as a rental lease plan, except that the leasing company will ‘sell’ the car to you. Therefore, here, too, an auto loan would be cheaper.
Tax angle
For self-employed and professionals, there is a tax advantage to leasing. “The value of lease rentals can be claimed as deduction," said Arvind Rao, chief planner, Dreamz Infinite Financial Planner. The entire lease rental paid is eligible for deduction.
Now, if you own the car, any expenditure incurred for the purpose of the business is allowed as a deduction from your business profits; as such, expenditure incurred on a vehicle used in the business that is fuel expenses, repairs and maintenance expenditure, vehicle insurance.
Mint Money take
Though leasing does have its plus points, it may not be for everyone. “Leasing provides options for customers looking for low capital outflow and propensity to change cars every three to four years. Considering the overall cost of ownership and unpredictability of resale value, leasing is cost effective," said Kern.
Taxation alone should not be the reason opt for a lease plan. One could use an approach similar to the way one decides whether to buy or rent an office space, said Rao. “Make sure that you do the math and weigh the financial benefits versus an outright purchase," he added.
As in the examples taken above, it is indeed more expensive to lease—especially on a monthly basis.
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