[lurker]

Don't buy a car, lease it. It's cheaper

Ravi Teja Sharma in New Delhi.

September 28, 2006 13:07 IST

Instead of buying a car, what if you could just rent one for regular use? Car rentals are popular in several countries, but this is about car leasing -- renting out cars on contracts that can last three years.

"Globally, it's not very important for many customers to have a car registered in their name. In India, a car is still considered an asset though logically the value of the car goes down drastically as soon as it is out of the showroom," says Rajiv K Vij, CEO, Hertz India, which started leasing cars in India about eight months ago.

The corporate segment is vast, and rental firms are targeting them for bulk deals. As with the manner in which credit cards started, the reason may be safety. The fleet sizes are still small, with Hertz expecting a leased-car tally of only about 3,000 cars by 2007.

Overall, there are about 25,000 cars on the streets on lease across the country, generating annual revenues of some Rs 600 crore (Rs 6 billion). The potential, though, is estimated at about 60,000 cars a year, says Vij, a reason that the market is sizzling ahead at 60 per cent a year.

Vij explains that there are two types of leases possible -- a financial lease and an operational lease. The latter, by which Hertz buys, registers, insures, accessory-fits and gives the car to the corporate, is more popular. Hertz looks after maintenance and all the rest of it.

The pricing is such that the customer pays only a little above the depreciation of the car (total value minus residual value at the end of the lease), plus maintenance. It's better than taking a car loan, claims Hertz.

Your monthly outgo on, say, a Rs 7.5 lakh (Rs 750,000) three-year loan at 11 per cent interest for a sedan would be about Rs 27,000 plus maintenance (at Re 1 per kilometer) of Rs 1,700 per month. Hertz promises the same car at only about Rs 16,000 per month, and a lower rate of maintenance.

The largest player in the Indian market today is LeasePlan, with over 11,000 leased cars on Indian roads, which is more than half the total figure. Again, its focus is corporate.

But what about the retail market? Surely individual car users would jump at the idea.

"The potential for B2B is more, and therefore we just lease to corporates as of now," explains Veerle Behets, managing director, LeasePlan India, adding that "collections are not so easy in the individual market right now."

It is true that the retail market involves higher risk. According to Sunjay J Kapur, CEO of Sixt India, another corporate-focused player, leasing needs to be fully backed by a bank, and as soon as that is in place, retail leasing should start.

Moreover, again as with credit cards, the base would have to be larger for the law of numbers to kick in -- reducing fraud to a predictably low level that can be cost-accounted for in the business plan. Sixt has just 150 cars on the road, though it plans to expand its fleet to about 15,000 over the next 3-4 years.

If business catches on, though, the big numbers could materialise even earlier.


http://inhome.rediff.com/money/2006/sep/28car.htm

[GTO]

As it turns out, my calculations were incorrect. I had calculated the depreciation benefits in their entirety but the fact is...depreciation is a cost and therefore, the actual benefit is 30% (or whatever the tax bracket) of the total depreciation.

Someone wrote to me and pointed out the errors. I have correct the uploaded excel sheet.

Lease works out cheaper by about 5.5 lacs!! I would appreciate if someone who is more proficient with tax details can have a look at the sheet.

Note from Mod : This thread is closed. Please continue the discussion in the Lease Or Loan Article