6 things to remember before Leasing a Car
The auto revolution is in its prime! If you’re in the market for a new car chances are you have many options at varying price points, some of them unaffordable. Just like there is no dearth of banks and their salespeople trying to get you to opt for Car Loans, individual leasing of a vehicle is fast becoming an option in most Metropolitan cities. Let’s look at the benefits and disadvantages of vehicle leasing (sometimes called a car rental) versus purchasing a car with an automobile loan.
Perhaps one of the most lucrative offerings of a car lease plan versus a car loan, leasing a car offers you the comfort of driving home in a spanking new car with no money paid down. This is a big benefit to those young, cash strapped individual who find it difficult to cough up the 15 – 20% margin money or down payment a bank expects you to make. Talk about a 15 lac rupee ($25,000 – 30,000) vehicle and the down payment can be as much as 4 lacs ($4,000 – 6,000).
A key consideration that most people make an emotional concern is that a leased car isn’t really ‘your’ car. The company you lease it from owns the car throughout the contract which typically lasts 3 – 5 years. Now having said that, there’s absolutely nothing stopping you from treating the car as yours but some buyers do exhibit a certain unexplained emotionality. One can understand why most people won’t be OK with pampering a car that isn’t technically theirs. However, lease plans often feature an option to own the car against a lump sum payment at the end of the lease term, typically 2 – 5 years.
An operational lease plan affords you the benefit of not having to worry about maintenance and insurance costs. This is applicable to both, periodic maintenance or damage / defect from an accident. So, as opposed to owning a car and bearing the cost on scratches and scuffs, a lease plan takes care of it for you. Better yet? They even pick up and drop the vehicle for you free of charge!
While calculating the cost benefit of leasing a car over purchasing a car with an automobile loan, one must consider 4 things:
- The absence of a down payment while leasing.
- The monthly lease versus a loan EMI / car payment.
- The free maintenance (lease) versus periodic service costs (ownership).
- The fact that at the end of the loan the car belongs to you and is available for you to resell.
Most buyers conveniently forget the 4th point. One must understand that after having paid all your loan EMIs / monthly payments your car is yours to sell for at least 15 – 20% of the original purchase value. This is a conservative estimate. For a 15 lac rupee car ($25,000), this translates to approximately 3 – 4 lacs ($ 4,000 – 6,000) (conservative) which can be used as down payment for your next car. Compare this to a lease plan, after having paid through a 4 – 5 year lease term, you either forfeit the car or are given an option to pay an unreasonable Lump Sum amount to retain vehicle.
Once you have decided to lease a car and have reconciled to the cost per month which may be marginally more than a car loan EMI, but let’s face it, comes with much less of a headache once you factor in the free maintenance, you have the opportunity to change your car every 3 years. Lease contracts are often signed for 2 – 5 years and can be exited without penalty, more so if you’re looking to get another car from the same lease firm. From the money management and lifestyle perspective, you’ll soon get used to the monthly expense. Once that happens, you can conveniently ask the lease firm to change your vehicle every few years. No down payment, no maintenance and no insurance costs!
This one’s especially for small business owners and professionals like chartered accountants and doctors. Most lease plan salesmen are taught to sell by telling you the monthly contract amount you pay is a deductible expense and hence helps in tax planning. While this is true, one must be aware that owing a car whether with a loan or without offers the same benefit to small businessmen as annual depreciation.
Buying versus Leasing a car will always be a judgement call and boils down to preference. Tell me what you think about owning versus leasing. Comment below to spark the discussion!