Advice

Lease OR Loan? Which EMI is better

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Chances are; you hadn’t even have considered the lease option on your next car (until you finish reading this article). Lease plans basically exploit tax loop holes to make owning a car much cheaper for you. It’s a win – win situation for you and the leasing organization as you enjoy lower monthly payments, and they (the leasing company) receive the depreciation benefits! How would you like it if we showed you a way to own the same car for a lower annual cost or a better car for the same annual cost? What’s more, you can have sole priority to buy the car at the end of the lease tenure!

On a typical 5 lac rupee sedan, a 90% loan of 36 months would entail a Rs. 1,00,000 down payment (10% of ex-showroom price + Registration + Insurance + 1 EMI) and a monthly payment of about Rs. 16,800. Compare that to a lease option on the same car where there would be no down payment and a monthly installment of about Rs. 17,400. You can have the car transferred to your name at the end of 36 months for Rs. 50,000 (10% residual value). Simple math would show you that the total payments in the loan option came up to Rs. 6,88,000 while in the lease they were Rs. 6,76,400. Factor in the opportunity cost of the Rs. 1,00,000 down payment and the fact that the entire lease EMI is tax deductible (versus only the interest part of your loan EMI) and you can gauge why lease offers a mouth-watering proposition. It is worth a mention at this stage that most benefits of lease plans are applicable to companies and self-employed individuals.

Lease plans could be either “Finance leases” or “Operating Leases”. Finance Leases are plain funding for acquiring a car, which would transfer the ownership of the asset to the lessee at the end of the lease term. Operating leases by name state that they are of an operating nature i.e. the lessor would grant usage rights of the car to the lessee and at the end of the lease term take the car back. If it is to be transferred, then the Lessee has to pay the Market price of the car prevailing at the end of the lease term.

Scheduled maintenance, accidental repairs, insurance management, fuel management and chauffeur services can be included in both types of leases.

Lease Advantages:

• You can claim the entire lease rental as an operating expense in the Profit & Loss Account, thereby enjoying a Tax benefit @ 33.67% which is higher then Depreciation @ 15% for Motor Vehicles. This benefit would apply if you enter into an Operating Lease agreement.
• There is no down payment in a lease. Therefore, it is freed up capital which you could otherwise use for investing in your business interests.
• Most popular lease organizations provide you with the option of transferring the car to your name at the end of the lease tenure. This is typically carried out at a pre-decided rate OR Market rate of the car (whichever you decide at the beginning of the lease term).
• If your organization has a fleet of vehicles, lease companies offer complete solutions that cover insurance management, regular services, maintenance and accident repair. This can make the task of fleet management considerably simpler.

Lease Disadvantages:

• Modifications to the vehicle are not generally permitted. You can, however, add accessories at the start of the lease tenure.
• In the case of an operating lease, limitations are imposed on the annual mileage.
• The car is not registered in your name. Not at least until you buy it at the end of the lease period.

Most popular Lease Organisations in India:

Orix India
Lease Plan

 
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