DARE - Because Entrepreneurs Do

Cost benefits and hassle-free maintenance make leasing a better option vis-à-vis buying, but some conditions apply

It is a dilemma that every entrepreneur is likely to face sooner or later. Every business, however big or small, has to keep aside a significant sum for the transport needs of its employees.

But what should one do to keep this cost down? If you think buying the fleet is an option, then think again because leasing could have its advantages too.

Having said that, whether to buy or to lease is the question that remains; to which the answer is: it depends on your priorities. For many people, purchasing vehicle is a kind of an investment. For others, saving is the need of the hour, and they prefer to tie up with such service providers. Whatever the reason, one should not just look at financial comparisons before making this decision. Here is a guide to what one should consider before making the choice.

Lease, buy, rent. What is the difference?
Typically, when one buys a vehicle on cash payment, one pays the entire amount of the vehicle. Similarly, when one opts for an auto loan, one pays the cost of the vehicle plus the interest. Besides these, maintenance and the fuel costs also have to be taken care of. Now picture this. What happens after a few years or after the loan period is over? The vehicle you purchased has depreciated in cost, and, obviously, keeping the other costs in mind, you have ended up paying more for the vehicle.

On the other hand, when a vehicle is leased for a certain number of years, you pay only a part of that cost. When leasing, a monthly rental is calculated based on the cost of the car, insurance, maintenance costs, and depreciation over a period of time. At the end of the lease period the leasing company takes care of the disposal of the vehicle. According to Sanjeev Prasad, Managing Director of LeasePlan India, the monthly lease rental is lower considering that it includes other costs, compared to a monthly installment when purchasing a car. This means, the extra money that you would have otherwise spent on purchasing a car can be invested better in core business.

But is leasing different from renting? Explains, Prasad, “In rental, the car is a physical stock of the renting company. The customer uses it for some time – day, two days, or a week – and returns it. In this case, the car and its maintenance is of the rental company’s choice. In contrast, while leasing, the car is never in the physical possession of the leasing company. It is always with the customer and the choice of car is also that of the customer’s.”

What are the benefits of leasing for corporate organizations?
Cost benefits: First, a company opting for lease does not have to make a capital purchase of the vehicle. They just have to pay for the use of the car. According to Karunesh Arya, Chief Operating Officer of Lease Business of Carzonrent (India), “Let us consider any vehicle and evaluate its value after a period of time. If we say, this vehicle will fetch us 40 percent of its initial amount after the lease period, then, 60 percent of the vehicle cost is what is taken into account to be charged to the customer.” Hence, the cost factor becomes significantly less.

The effect of this is that there is no use of the company’s precious equity in buying the vehicle. If a company has taken a debt, their debt raising capacity gets affected in case of buying. But in the case of leasing, there is no equity allocation required, which can be used for their core business.

Another benefit is that company vehicles are generally not used to generate revenue for the business. It is used by the employees for official needs. In this case, leasing helps as the leased vehicle becomes a completely off-balance-sheet item.

There are other benefits as well. Explains Arya, “There are three things: first, when a leasing company buys a vehicle, they are able to get better deals from the automobile manufacturers; second, in terms of operating costs, it becomes a pre-budgeted expense, that is, you know you are going to shell a particular amount to maintain the vehicle, and are not going to pay anything more than the lease rent; third, we as a leasing company get a good garage benefit, which can be passed on to the consumers.” This might mean that while going for the lease, to get a better deal, you can negotiate with the dealer on price.

This can be especially beneficial for smaller players because say if they buy, say, five cars, out of which two encounter some problem, then a major part of its fleet is affected. Now, if these vehicles had been leased out from a company that had 1,000 vehicles, the probability of getting affected becomes much lesser. Thus, becoming a part of a larger fleet reduces costs.

Tax benefits: There are also advantages to be had when it comes to tax considerations. According to Arya, “If companies buy a vehicle, they get depreciation benefit at 15 percent. If they take debt, on the interest part they get a tax break. Let us say a company leases out a car for a period of three years, on about 40 percent of the asset value. Then they they get a tax break benefit. Whatever the lease rent paid, including maintenance cost, there is an expense off the complete piece. So you get a far higher tax break than when the vehicle is in your books.”

Focus on core competency: Buying is just one part of acquiring, but another major part is managing it, which might not be the core competency of the company. According to Arya, “Leasing provides a complete outsourcing of fleet management activity, which takes care of all aspects, from buying the fleet to complete management like repairs and maintenance of the vehicle, managing insurance, breakdown services, and annual renewal of insurance.

Mobility: Another question that might have popped up is what if an entrepreneur has offices in several cities, or, on a larger note, across several nations. Can car leasing be a solution to that too? Well, yes. Let us say you have 20 offices across the country. There is a corporate office that houses the administration department, and the other departments are located elsewhere and have just a few employees. You want that all employees should get equal transportation benefits. In this case, says Arya, “Leasing can help as most leasing companies have a good network, and we can provide leasing services in those cities at no extra cost.” Hertz provides services in 78 cities through its tie-ups.

Similarly, if you have an international fleet, then global car leasing companies can help. Says Prasad, “Besides having a presence in 150 Indian cities, we also provide services abroad through LeasePlan International.”

No minimum order size: There is no minimum order size; no matter how big or small your company is, you can opt for car leasing. According to Prasad, “We do have clients whose requirement in just one car.” Wondering how they manage it? “The point is simple,” adds Arya, “a company may have a two-car requirement in a particular city, say, Jaipur. But we may have 100 to 200 cars in Jaipur. And since we have garage and insurance tie-ups, we are able to provide services at no extra charges.”

What are the benefits of leasing for employees?
“As for the employee,” explains Arya, “the benefits form the lower cost of the car — he gets a benefit of lower cost of maintenance, expert advice, and a priority benefit at the garage.” Besides these, the money for the car goes from the pre-tax salary, which means the employee gets a slab benefit on the income tax.

Another advantage is that if a car breaks down and if the company has opted for uninterrupted mobility, the employee gets a replacement immediately. Therefore, he is mobile at all times. He does not have to follow it up with the garages, among other things.

What all to take care of?
Consider this. What happens if the vehicle is stolen or gets damaged? Generally, the cost you pay to the leasing company is GAP-covered. This means, if your vehicle is stolen or is damaged, the insurance company and the leasing company pay back for it. But be careful, there might be a catch in this. Since all the cost is not borne by the insurance company, there is a chance that you might end up paying the residual amount.

The second thing is: read your exit clause thoroughly. Once a car goes back after the lease period, it is sold in the second-hand car market. This is done by the leasing company itself. However, the customer might have to pay the residual amount. This means, say for example, a car is worth Rs. 5 lakh and you have paid Rs. 70,000 as the lease amount, after the end of the lease period if the car is sold for Rs. 4 lakh, then the remaining Rs. 30,000 might have to be paid by the customer.

When is leasing better?
Car leasing is not always better. It is not economical when it is done for a very short or a very long period.

According to Arya, “A three-year period is the average. The value the vehicle gives after three years. It is the most optimum used car sale value. Another thing is that the maintenance cost of the car is quite optimal for a period of three years.”

Comments (7)

Subscribe to this comment's feed

Carid
written by Enthony, December 17, 2010

There cannot be a one-place solution on what’s better - to buy or to lease vehicles. A company should make a choice depending on their own targets, budget conditions and even branding strategy: while in most cases car lease is a reasonable solution, a company may elevate to the level when buying new vehicles may be a better option.

report abuse

vote down

vote up

Votes: +0

second hand cars
written by Rob Cook, October 29, 2010

I would Recommend to Lease the car, which include Only fare or a rent on your Head & other than that would say Second Hand Cars are also Good to have, which with Low cost.

report abuse

vote down

vote up

Votes: +0

Old Car Trader
written by Old Car Trader, October 08, 2010

Its Not Just about to avoide to maintain your car but with car leasing you can have different choice of car every time as you like. or else to have Used cars & sell it off in some time.

report abuse

vote down

vote up

Votes: +1

Car Review
written by Car Reviews, June 10, 2010

while reading this article i thought how some know what in my mind ?
i mean your article is very understandable to every mind & very usefull too, i also have my car on lease.

report abuse

vote down

vote up

Votes: +0

Cars 2010
written by Rumana Akter, June 08, 2010

Cars 2010

An automobile, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor.

Read More: www cars com,
http://www.wwwcarscom.com/

report abuse

vote down

vote up

Votes: +1

Used cars & Jeeps
written by surabhi, May 20, 2010

Very good informative article. We are doing sell-purchase used jeeps & cars.

report abuse

vote down

vote up

Votes: +0

Car Lease
written by Premanandhan, February 25, 2009

I have used 3 cars personally but i feel it is always good for lease. I have written my experience in my blog have a look at it

http://www.technosolutions.in/2009/02/car-lease.html

report abuse

vote down

vote up

Votes: +3