Many consumers are in doubt between financing a car or using vehicle leasing. Before making a decision, it is necessary to know that there is operational leasing and financial leasing. Knowing the difference between the two alternatives makes it much easier to make a decision.
What is vehicle leasing
First, you need to understand what car leasing is. Through vehicle leasing, a company can obtain a vehicle for a specified period. In this modality, the owner of the vehicle is the leasing company, which in turn charges the consumer a monthly amount for the use of the vehicle. In general, it is common for this vehicle lease to be signed for a period of 12 to 48 months, however in some cases the period may be longer.
Thus, it is important to highlight that the consumer needs to return the car to the company at the end of the contract. Another legal detail is that vehicle leases are tax-deductible. Another important factor is to be aware that there are two types of vehicle leases, finance leases and operating leases.
Operating leases
Those who opt for operational leasing need to understand that the vehicle will be leased for a fixed term and the vehicle will be owned by the leasing company. So let’s assume an operating lease is being advertised as ’36 months, 95,000 km mileage and full warranty’. This means that the car will be leased for a maximum period of three years and the consumer will have to travel less than 95,000 km.
There are numerous advantages to operating leasing. In this way, many people prefer vehicle leasing rather than buying a car. One of the advantages is that the cost is 100% deductible as an operating expense. According to some contracts, the responsibility for paying for the maintenance of the car lies with the leasing company. As the contract appears ‘off balance sheet’, the remaining rental cost will not appear as a liability in the consumer’s bills. In this modality, a large working capital is not required to invest immediately. Generally, the car rental payment is fixed, and therefore it is easier to fit into the budget.
In operational leasing, the vehicle is delivered to the company at the end of the contract
But, as not everything is a paradise, there are some disadvantages of this type of lease. The vehicle must be delivered to the leasing company in good condition. In case of poor conservation, the consumer will be obliged to pay the ‘renovation fee’. By signing a contract with a fixed term and a fixed mileage allowance. Consumers who want to drive more with the vehicle will need to renegotiate the contract.
It is necessary to be aware, as there may be contract termination fees if the consumer wishes to return the car before the established deadline. Check if the contract proposes a termination fee if the contractor wants to terminate the contract before the established deadline.
Some leasing companies may exclude tire replacement, and this incurs a cost when returning the vehicle. If it is not included in the contract, it might be a good idea to negotiate the inclusion of this package.
Financial leasing
Many people don’t even realize it, but there is a fundamental difference between operational leasing and financial leasing. At the end of the contract, the renting company becomes the definitive owner of the vehicle. To rent a car in this mode, it is not necessary to borrow or invest a large amount of money. In most cases, monthly payments tend to be more attractive than financing a car. GST can be claimed back on the rental element. Vehicle depreciation can also be accounted for.
However, there are some downsides. Contrary to operating leasing, the cost will not be 100% tax-deductible. On your balance sheet, the vehicle will be considered an asset, and the unpaid amount will appear as a liability. Another factor is that as time goes by, your asset will depreciate and be worth less each year. Although the consumer may factor in the depreciation cost, this will still be a waste of money.
Pros and cons of buying a car
Pros
When buying a vehicle for the first time, consumers will experience the feeling of actually owning a car. Freedom to move whenever you prefer. You do not return the car at the end of the contract. If you wish to trade in a car, it’s yours to trade as you see fit. The mileage limit is free, after all, it’s your car and you can decide how much you want to drive. Do you want to customize your car? Change upholstery? You can make as many edits as you need.
Cons
Monthly payments are typically higher than long-term vehicle leasing. If the chosen car is not a rare and classic vehicle, your vehicle will lose value as time goes by. If you don’t have the money to buy a car, you can take out a loan, but you will pay interest on it. Vehicle repairs are your responsibility. While new cars need repairs, older vehicles may need even more repairs.
Lease a car or buy a car? What’s the smartest choice?
This answer depends on numerous factors. That way, it’s an individual response. Therefore, each consumer must make a deep analysis regarding their own conditions and life circumstances.
The first fact is that renting a vehicle in the medium and long term will cost more than buying the car. So is it better to buy? Maybe yes maybe no. If the consumer lives in a remote rural area, with more difficult access, it is very likely that buying a car is the best option, as it can be used daily to move around, go shopping, and everyday things.
When is it worth resorting to vehicle leasing or buying a vehicle?
Also, in this case, as the consumer lives in a rural area, owning a vehicle will be of great importance in times of emergency. Now, the consumer who resides in a city where there is a good public transport system, there may not be any consistent reasons to invest money in a vehicle. In this case, consumers can use public transport at a daily rate that is infinitely cheaper than what they would pay to buy a car. When you wanted to travel, you still had the option of renting a vehicle for vacation trips or family weekend trips, for example.
Another factor is that nowadays, depending on the city where the consumer lives, finding parking in large city centers is a very difficult task. Therefore, in order to have a safe parking lot, in many cases it is necessary to pay for the time the vehicle will be parked in this place.
Given this information, it remains for the consumer to make an analysis and decide whether buying a car right now or renting it is the smartest decision. This will depend on the reality of each person.