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Posted by Karen Thornalley

Hertz-LEASING OR BUYING? WHICH IS BETTER?

Jul
6
2014
hertz2

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Motor


LEASING OR BUYING? WHICH IS BETTER? YOU DECIDE. “If it appreciates, buy it. If it depreciates, lease it.” J. Paul Getty An educated buyer will always be able to get a better deal.

1. GENERAL OVERVIEW For those who have never leased a car, leases can seem confusing, complicated and geared more toward business owners or individuals who simply can't afford car payments. These perceptions may be outdated. Before eliminating leasing as a financing option, car buyers should gain a solid understanding of the different purchasing processes. A lease is essentially a long-term agreement, offering exclusive use of a car for a set period at a fixed monthly price. It’s already hugely popular and corporate buyers are now considering leasing as an attractive alternative to buying a new car with bank loan, dealer finance or company financial reserves. Leases and purchase loans are simply two different methods of automobile financing. Leasing finances the use of a vehicle; buying with a loan finances the purchase of a vehicle. Each has its own benefits and considerations. When making any important financial decision it pays to be thoroughly prepared. Knowing what form of car finance is best value for money for your organisation, given your circumstances, can have a significant impact on the costs of operating a car. The more information and knowledge that you have on a subject, the more likely you will be in a position to find the most attractive deals and to negotiate contracts that work best for your organisation.

2. HOW DOES IT WORK? Buying a vehicle means full, up front purchase. It can be funded through financial reserves or using alternative methods of raising finance. The finance may or may not be linked to the purchase of a specific vehicle. As legal owner of the vehicle you continue to bear all the risks of ownership including maintenance and repair costs, depreciation and resale value. With leasing, vehicles are owned by the lessor and are hired to you for a set period of time at a fixed monthly rate. This method of finance can be useful for organisations wanting to free up credit lines or improve cash flow by implementing fixed cost fleet operation. The monthly lease charge is calculated based upon the cost of the vehicle, the contract period and the anticipated resale value. It also takes into consideration the predicted mileage, service and maintenance costs, together with any additional services such as relief vehicles. Buying and Leasing are Different Let us guide you through this with simple comparisons. Buying • You pay for the entire cost of a vehicle, regardless of how many miles driven or how long the vehicle is kept • If financed via a loan for the entire cost of the vehicle then monthly payments can be more expensive than a lease • You typically make a down payment to the dealer for the vehicle • The remaining cost is then financed by a loan with the first repayment made a month after signing your contract • At a later stage, you may decide to sell or trade the vehicle for its depreciated resale or trade value Leasing • You pay only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it • The monthly payments for lease are generally lower than monthly amounts for a fully financed car loan • You may be required to pay three months upfront as a first payment upon signing the contract • At the end of the lease contract, you may either  return the vehicle with no obligation  extend the current agreement  purchase it for a previously agreed resale value, or  take a lease for a new vehicle How are Loan and Lease Payments Different? Loan Payment

Loan payments have two parts: a principal charge and a finance charge. A loan company or bank issues money directly to you or a dealer, and you agree to repay that money, with interest, over time. The principal charge pays off the full vehicle purchase price over the length of the loan, while finance charge is loan interest on monthly unpaid balance. The finance company or bank will hold the vehicle's legal title until the loan has been completely repaid. Lease Payment Lease payments are also made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you're driving it. In effect, you are borrowing the money that the lease company used to buy the car from the dealer. You repay part of that money in monthly payments.

However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing — it's part of each monthly payment that you never get back, even if you sell the vehicle in the future. With leasing as the monthly lease charges are lower than a bank loan for a full purchase value, you may have the option of putting these monthly savings into more productive investments for your company. Many finance experts encourage this practice as one of the benefits of leasing.

3. BENEFITS Buying • The customer buys the vehicle for full purchase amount directly from dealer or manufacturer • The customer manages all costs and risks associated with vehicle management • If financed by own reserves, the vehicle is owned by the customer immediately • If financed by loan then the vehicle is owned by the customer once all payments have been made • The car can be sold at any time although banks that have a financial interest in the vehicle may require full repayment of any outstanding amount

Leasing • Simple agreed fixed monthly fee that covers the full vehicle management and associated services • The leasing company takes on all risks associated with the vehicle including running costs, depreciation and resale • The customer can request a set budget for each month and the leasing company can provide a relevant offer • The leasing company can also provide policy advice and development, a vehicle replacement service, consolidated management reporting, reduced administration management and a full driver support service • Monthly payments are usually lower than a similar bank loan for a full purchase amount of the vehicle • New vehicles can be supplied every few years • Fixed cost motoring for a fixed number of months

4. CONSIDERATIONS Buying One key consideration of owning versus leasing is the monthly payment, which, if financed by a bank loan is usually higher on a purchased vehicle. Additionally, dealers usually require a reasonable down payment, so the initial out-of-pocket cost is higher when buying a car. Presumably, as you pay down your car loan, you have the ability to build equity in the vehicle. However, this is not always the case. When you purchase a car, your payments reflect the whole cost of the car, usually amortised over a four- to six-year period. But depreciation can take a significant toll on the value of your car, especially in the first couple of years. As a result, buyers who put down modest down payments can end up financing a considerable portion of the car and even find themselves in an "upside-down situation," in which the car comes to be worth less than what the buyer stills owes on it at a given time. Like the monthly payments of a mortgage, monthly car payments are divided between paying principal and interest, and the amounts dedicated to each vary from payment to payment. In the first years in which you pay back your car loan, the majority of each payment goes toward interest rather than the principal. But in the first couple years after being purchased, most new vehicles depreciate 20 to 40%. The loss in equity is a double whammy: your car depreciates dramatically, and because the monthly payments you've been making have mostly gone towards the interest rather than the principal, you are left with very little equity in the car. Leasing By leasing a car, you always have a monthly payment. As long as you lease, you will never own it. However, depending on your type of lease, when your lease term is up, you either hand the keys over to the leasing company and look for another vehicle, or finance the remaining value of the vehicle. Excess mileage charges apply should the vehicle be driven more than the previously agreed contracted annual mileage

5. QUESTIONS YOU MAY HAVE Lease or Buy? Which is better? Depends on what your company’s priorities are, car lease-versus-buy decisions must be made with your own strategic objectives and financial considerations in mind. What's right for one organisation can be different for another. • Is having a new vehicle every two or three years with no risks important? • What impact does my purchasing decision have on my company’s cash flow? • How will a purchasing or lease decision affect my company’s drivers? • What level of expertise does my company have in the world of fleet management? • Is ownership in the vehicle important to my company?

Buy If you • agree and understand the probability of higher monthly payments • prefer to own the vehicle • prefer to build up some trade-in or resale value (equity) • like the idea of paying off a loan • can manage the variable cost of maintaining a vehicle • are likely to use the vehicle for significant numbers of years

then buying may be the most attractive option. Lease If you • want fixed cost motoring • enjoy driving a new car every few years • want lower monthly payments • like having a car that has the latest safety features • enjoy the freedom of knowing all repair, maintenance and servicing costs are covered • are unsure about trading and selling used cars

then leasing may be the most attractive option.

What Makes Up a Lease Payment? A lease payment is calculated based on combination of factors including vehicle purchase price, anticipated mileage and resale value, maintenance and servicing cost, insurance coverage and replacement vehicle cover. As large leasing companies purchase thousands of vehicles from the manufacturers each year, prices are negotiated at a bulk level with cost savings passed on to customers via the lease rates. This principle also applies on servicing and maintenance spend whereby leasing companies proactively manage costs and vehicle downtime. The below table shows and illustration of full costs associated with outright purchase against the cost of an operational lease. These figures are all based on a Toyota Prado 2.7 Top Range LWB being driven for 30,000 kilometres per year over a three year period. All numbers are in AED. Toyota Prado 2.7 Top Range LWB Outright Purchase Operational Leasing Purchase price 146,000  Financing cost @ 5.5% per year 24,090  Vehicle servicing and maintenance 18,720  Insurance 17,520  Replacement vehicles @ AED 342 per day x 6 per year = 2,052 6,156  Vehicle resale at contract end (70,000)  Sub total 142,486  Monthly total 3,957 3,716 Other considerations:

• Headcount to manage fleet • Supplier management to control service and costs • Vehicle downtime management • Legalities • Vehicle registration fees • Administration, invoice management and processing • Hassle factors  FINAL COST Above 3,957 3,716 7. SUMMARY & CONCLUSIONS To summarise, car leasing can be an effective solution for companies who want to save on monthly vehicle costs and prefer the security of knowing a fixed monthly fee will cover all vehicle related eventualities. In addition leasing a vehicle can give companies a regular supply, every few years, of new up to date vehicles. Purchasing can be a more attractive option for companies who wish to keep vehicles for an extended period and prefer to have the knowledge that the asset is owned and managed by themselves. The decision to lease or buy will always depend on your organisation’s strategic objectives. For many organisations leasing is a hassle-free, cost-effective and productive experience that decision makers return time and time again.

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