Lease or loan? Pro's and Con's of each.

[Rtech]

While we are all aware of the procedure involved with taking a loan out for our cars, leasing is something that hasn't really caught on in India yet. Atleast not in the mainstream.

can someone clearly note down the pro's and con's of each - leasing vs buying with a loan.
- Is there something we are all overlooking when it comes to leasing?
- Is it a better deal than buying?
- Which companies offer lease plans in India?
- Can an individual obtain a lease or is it only for companies?
- Can a vehicle taken on lease be modified in any way? (larger wheels, headers etc)
- How would the EMI for a lease compare to the EMI's for a loan taking present day interest rates.

Waiting for some comprehensive explainations and answers.

[ajmat]

Leasing only makes sense from a tax persepective - more applicable for companies. No idea re: self employed individuals. Let me consult a book or two and revert

[condor]

RTech, a previous thread with some related information:
http://www.team-bhp.com/forum/auto-f...ighlight=lease

Another
http://www.leaseguide.com/lease03.htm

http://autos.msn.com/advice/article....1836&src=lease
http://autos.msn.com/advice/article....tentid=4021832

Is leasing better than buying? It is subjective. Depends on the individual, mostly

Toyota, and I think GM are offering leases with their buy-back guarantee plans. These plans are nothing but leases.

Individuals should also be able to lease these cars.

Modifications wouldnot be allowed. Guess anything that voids warranty would be a no-no. Headers - definite no.

EMI's are typically lower - but, you will not have the car with you at the end of the term. Basically you are paying for the depreciation of the car, and the interest, to the company that provides the lease.

The second link above should give you more information. Also search on Yahoo & MSN auto's.

The lease terms are typically very strict in terms of periodic maintenance at dealerships, limitation on distances covered, and insurance. Additional distance covered are normally charged separately.

Typically:
Term will not be shortened.
You can still buy it from the company at the end of the term.
Good option for people who want new cars every 3-4 years, and who want first use of the car.

[Rtech]

Thanks for the links Condor. The link to the Toyota deal thread was more focused. I thought of starting an indipendent thread to chalk out the points.

- On the face of it, doesn't it make more sense for the ordinary owner who does not do anything to his car excpet drive, to go in for a lease? This way he does not have to bother about any expenses, whether caused by an accident or mechanical problem.

[kurmist]

Lease options are offered to corporates (don't know about individuals) typically by companies like Leaseplan, Orix etc. Have been availing this option for past 3 years and must say that am not too happy with the deal. The way it works is:

1. Corporates tie up with above mentioned cos for employee availment according to grade / entitlement
2. Lease plans offered could be simple leases or operative / maintenance leases (where the lessor take care of vehicle maintenance as well)
3. Typically operative leases would mean that the employee would not be able to avail of full value of entitlement i.e. vehicle commensurate with value of payment. For eg. in one of my earlier roles, the entitlement was for Rs 15 K per month and the options in cars were Ford Ikon Flair, Getz, Swift etc. IMO if I were to buy the car, I would pay a far lower EMI for the same or get a higher segment car for a same EMI of Rs 15,000.
4. Lease periods are typically for 4 years with max. annual mileage of 20,000 Km i.e. 80,000 km over the 4 year lease period
5. At the end of the 4 yr lease period, the employee has the option of purchasing the vehicle at book value (depreciation usually at 20% p.a.)
6. The catch here is that if the employee terminates employment prior to lease end, he/she is liable to pay the difference between book value and actual selling price (if any). While it sounds fine theoretically, IMO I feel that the leasing cos. have a nexus with car dealers whereby the selling price given is usually lower than prevailent market price. Eg. i had a one year old Ikon Flair (4300 km on odo) which was sold by the leasing co. for Rs. 340,000, while book value was Rs. 360,000. On top of that, I also had to pay sales tax + balance registration and insurance charges. Total hit on my wallet...Rs. 90,000.

In a nutshell, thats how it usually works. Dont have much of a clue on individual lease schemes.

[GTO]

I gotta admit, the benefits to a company in leasing are a LOT more than in ownership. I am just in the process of receiving more details from www.leaseplan.com and will update this thread once my accountant has completed all the calculations.

It looks promising, but I will hold the verdict for later. Keep in mind that the benefits are keeping a businessman in mind, not an individual leasor.

[ritik123]

In India it makes sense for a company to lease a car. The entire depreciation on the car can be claimed as an expense, so your profits would be lower by that amount on paper and your taxes would be lower in reality.

For an individual working in the company it would not benefit much to take the car on lease. EMI's will be higher than the market and at the end of the lease he would be the second owner of a car which he bought first hand. Of course his take home salary will increase by some small amount but that IMO would not compensate for the lower resale and higer EMI's.

It might make sense though if the employee only has short term plans of staying with the employer and does not want the car when he leaves.

[lurker]

My service station deals a lot with Leaseplan and one thing I notice is that they NEVER clear my bills on time. Their payments are always late and every second time I have to send either my senior accountant or go myself to clear the bills.

That is the way they do business with me.

[tsk1979]

Leasing is done by companies for their employees, and takes advantage of a hole in the tax fabric.
This is how it works.
Lets say an Empolyee E works for company C for salary S/month.
Now the employee can go to the bank take a loan, and pay some emi every month.
His salary : S-Emi/month -tax

Case 2. He goes to the company and asks for a car. The comany buys a car lets say in lease L/month. Now the company reduced the employees salary by L
So his salary now is (S-L)/month
Now L is same as EMI.
But since salary is reduced, he pays only perk tax for the car and lower tax
they company pays lower tax because its providing the car to employee.
At the end of the 4 year lease, the employee buys the car at 10% of the cost.
Now lets say car was 5L, after 4 years he pays 50000. Income tax dept after applying depreciation says car cost is 1L, so employee pays tax on 50000extra

At the end of it all, the cost of the car works out the same as a 2-3% interest loan, and if your salary is such that the reduction puts you in lower tax bracket, the total cost paid from your pocket is actually less than the cost of the car.

Many "good" companies pass on their tax benefit to employee. So free insurance and no Road tax upto a certain amount for 4 years!

[Rtech]

Ok. So just got a working from one of the lease companies. I told them to calculate the EMI's for a Swift ZXI.

Their working:
Option A: OPERATING LEASE WITH MAINTENANCE
This is where everything during the lease period is taken care off (standard warranty work/servicing/insurance/damage from accidents etc)
EMI: 17,095 x 36 months.

Option A: OPERATING LEASE WITHOUT MAINTENANCE
Here the owner takes care of all maintenance. The leaser pays for the comprehensive insurance though.
EMI: 15,801 x 36 months.

Annual running is 15,000 km per year. Anything above that is charged at Rs.2/km. Along with that, there is the usual list of "not covered in case of....." .

Now, how does that EMI compare with a loan of the same tenure? Anyone? Not very atttractive I think.

[GTO]

Not very atttractive I think.

Very attractive for businessmen. Say I were to go for the Swift.

1. I would claim the entire 15801 as an expense, and my taxable income becomes lower...exactly by that amount. So the net benefit is 30% of 15801 (since I fall in the 30 percent tax bracket).

2. I dont have to put any downpayment. That is cash I can use for marketing / employee training etc.

3. At the end of 36 months, I have paid Rs. 398186 (after tax benefits) + 50,000 (10% of the cars value). Thats 4.5 lacs - a LOT less than the price of a brand new Swift ZXI.

Plus I didnt pay a penny for the insurance either, nor any interest amount on EMIs. And again....no downpayment.

Atleast, this is the analysis from a weeks knowledge of car leases. If anyone has more information, corrections would be more than welcome.

[GTO]

As it turns out, Lease is beneficial to business owners and does work out cheaper. I have attached a comparision sheet for the Mitsubishi Pajero 3.2, and the Lease option makes the Pajero cheaper by a whopping 5.5 lakh rupees! That plus the benefit of not making a 11 lac deposit.

I have included an excel sheet with this post, which includes the calculations.

Notes on the Excel sheet (attached with this post):

1. Depreciation has been calculated at 15% p.a. (as per current laws).

2. WRT the benefits every year, I have taken 30% of the lease amount. In the Finance calculations, I have taken 15% of the residual value as depreciation + 30% of the interest payable as is available under tax benefits (Only rough calculation of tax benefits has been entered).

3. In the lease plan, you have to pay 20% of the original ex-showroom price to transfer ownership at the end of 60 months. That has also been included in the calculations.

4. Ex-showroom price of the Pajero is 35 lakhs. On-road Mumbai company registration is 39 lakhs.

5. Neither includes maintenance. Lease plan includes only the first year of insurance.

6. Lease EMI is 71038. Finance EMI is 53,243 (I bet its still bargainable).

Bottomline : To business owners like me, Lease ROCKS!

[shuvc]

As @tsk1979 explained .. it is beneficial for employees where the benefit is passed on by the companies ..

@GTO , in your example, thinking aloud .. could this be a possibility -
Say the business purchases the car using Finance EMI and then 'officially' it is used by one of the salaried employees who pays the EMI. The employee can get the tax benefit and the business gets the depreciation benefit. Now if the 'salaried employee' is a stakeholder in the business, then he/she ends up getting double benefit

[GTO]

Shuvc

The employee is not entitled to any tax benefits (to the best of my knowledge). So what difference does it make?

[hondadude]

Originally Posted by GTO

Shuvc

The employee is not entitled to any tax benefits (to the best of my knowledge). So what difference does it make?

Not true. At least for mine and some other companies in bangalore, following applies if employees lease car (via the companies they work for)

1. EMI that employee pays is not taxable
2. If employee leases a car through the company, the amount of money spent on Petrol is tax exempt (up to a limit ofcourse)
3. Money paid on Insurance and Services is also tax exempt
4. Driver salary is also tax exempt.
5. The total money can be tax exempt for points 2, 3 and 4 above can't be more than 1.5 L

The only catch is that LeasePlan interest rates are a bit higher than market but overall it is a huge benefit for the employee.