)
Competition in the passenger-car segment is heating up and the worsening economic condition is making things better for car buyers. Car manufacturers are wooing prospective car buyers with goodies including huge cash discounts, waiver of processing fees and low interest rates. Some of the innovative schemes doing rounds include options like payments deferred by periods extending to one year and even offering a second car absolutely free at the end of five years after buying the first car. Car buyers could not have asked for more.
It is quite common for individuals to remark that buying a car is purely a 'status' symbol and does not count as an investment. The rationale for this thought is pretty simple - car is a depreciating asset. At the end of its useful life, the used car will not fetch much value. Keeping this proposition in mind, does it make sense to buy the car using finance options? Even at low interest rates, such as 6 - 7 per cent, should an individual look at paying interest to buy a depreciating asset. If the car is intended to be used for business purpose, then the interest that is paid is at least giving the business some tax benefits; but nothing of this at all for the salaried individual.
Jumping into the bandwagon of providing options, recently some of the luxury car makers have started offering a new option - leasing the car for a fixed period.
Leasing - a flexible solution
Leasing (also called as Operating Lease by some car companies) is a flexible solution whereby the vehicle is leased to an individual for his chosen period and / or mileage, with the option of including insurance, registration and maintenance in the monthly rental. The ownership of the car remains with the company and so also the liability.
During the lease period, the individual simply pays his monthly rentals and can enjoy driving the car. The fine-print of the lease will also specify the condition in which the car needs to be at the time of return, in order to avoid paying additional charges to the company.
At the end of the lease period, the individual simply returns the car back to the company and will also be eligible to lease another vehicle of his choice. In some cases, the company even considers in extending the lease tenure for the individual.
Benefits to individuals
Typically, the lease rentals are lower than the EMIs paid for the loan servicing. These savings can be utilised by individuals to invest for their other goals or simply increase their spending budget. Many individuals have a passion for cars and look to change their cars more often. The leasing option, as described above, is an excellent means to fulfil this passion.
The table highlights the comparative advantage of the leasing option over a financing and ownership models. The data used for the illustration is a luxury car, where the total cost, including insurance and registration paid upfront is Rs 29,51,448. The tenure of the loan is 36 months with 90 per cent funding and the lease period selected is also of 36 months.
No down payment required; which means the individual's capital can be utilised for other productive purposes like providing for business capital, family responsibilities like children's education, own retirement and so on.
A lease is far easier to obtain than a finance option.
Although the ownership model (both under financing and outright) provides depreciation benefits for the business individual, the tax-savings is not equivalent to savings provided under the lease option.
For self-employed individuals or businessmen the entire lease rental paid is eligible for deduction under the tax provisions. At 33.99 per cent tax rates for individuals in the highest tax-brackets for the current fiscal, the tax-savings provided by lease rentals is the highest.
More importantly, the car itself being a depreciating asset, the resale value will always be lower than the purchase value, thereby, making the lease option more lucrative. When you buy a car, the depreciation is your burden as the car owner, the same gets reflected in the price that one fetches for the car later. Whereas in a lease, the company is the one who accepts the depreciation, since they will be taking the car back.
Maintenance costs are pretty low, since most warranties for new cars extend up to three years, which is a typical average lease period.
The individual does not have to worry about the resale of the car and can thus plan his upgrades easily.
Service costs - not a deterrent
For many car owners and car buyers, intrinsic costs of owning a car, namely service and maintenance costs, is a big deterrent in making the buy decision. Typically, various costs of maintaining the car like servicing, registration, insurance and so on can all be bundled and made a part of the monthly rental. Thus, the cost of maintaining and driving the car is reduced to just one figure, namely the rental. Based on one's budget, the individual can zero down on the rental and accordingly choose their car.
Although leasing offers so many benefits, it is not popular option.
The choice between buying a car versus leasing can also be a lifestyle choice. People who prefer driving a new car every few years find the lease option more appealing. Since the monthly payments are less expensive than purchasing a car, they are able to drive better cars than could afford to buy.
The writer is a certified financial planner
