Buying and driving a new car might be costly somehow. So you got another option, Lease a new car with ‘0’ mileage. Yes, think again. It’s all about the very brand new dream. It is important to own a car whether by buying or leasing a car. This day, a lot of auto buyers are Car Lease to save as well as to maintain a new model every few years.
- 1 How does leasing a car work?
- 2 What is a Car Lease?
- 3 What is really means?
- 4 Personal Car Leasing
- 5 Commercial Car Leasing
- 6 Restrictions When You Lease a Vehicle
- 7 Leasing a car vs buying:
How does leasing a car work?
A car lease is the easiest way to get a new car every few years as the leasing company or the dealer handle disposing of the old one. It works best for people who drive fewer miles than others, have the latest tech and gadgets, and the people who have less savings for the down payment.
Leasing is nothing new to the world, people across the USA have been able to get easy financing on cars with leasing for years. But, if you’re new to the term, leasing can seem tricky and it’s better to know what it is and how it works.
What is a Car Lease?
A car lease is an arrangement in which you pay your leasing company as they give you the right to drive your leased car. Remember that the money payment you make to the leasing company doesn’t build equity or ownership for you in the car. With the monthly payments, you are just playing your role and upholding your side of the bargain that lets you drive the car for a specified period of time.
What is really means?
Mostly the fact is misunderstood as ‘renting a car.’ But that is misleading and the truth is – leasing is just another method of financing a vehicle. With car leasing, you pay for the use of a vehicle instead of purchasing it from the dealer.
The use of a leased vehicle includes its depreciation cost, any excessive wear and tear caused during your leasing period or any excessive mileage.
Unlike the traditional car loan, where you’ll have to pay down payment and interest rate on the purchase price, with leasing, you pay only the finance charges (interest rate) as the leasing company purchase the vehicle and turn around and lease it to you.
In simple terms, car leasing companies are just like finance companies as they will do both car financing and leasing.
Personal Car Leasing
People applying for vehicle finance as a private individual are eligible for personal car leasing. It allows the users to use a car or van for a set period of time with a fixed monthly payment. Personal car leasing is becoming a popular method of running a car at cheaper cost. Once the lease ends, you simply hand back the car to the leasing company.
Although there are a number of different personal lease contract types, here are the top three of them:
Personal Contract Purchase (PCP)
This is a financial agreement meant only for the individuals not businesses. Personal contract purchase is a great way to have a car if you are hunting for a car. Please note that VAT is not imposed on your monthly payments here. It is only imposed when you opt to include a full maintenance package.
Personal contract purchase works similar to hire purchase.
Advantages of personal contract purchase:
- Fixed monthly payment
- Low initial payment
- Option to refinance the final payment
- No depreciation concerns
- Maintenance and servicing can be included
Personal Contract Hire (PCH)
This is another way of renting a car or van for a long time. Make sure to be ready to follow the regulations very carefully or else you will offset the cost of any damage to the vehicle. For example, you may be liable for the charges if you exceed the mileage; noting that you cannot buy the car.
This lease type does not make you eligible to buy the car. The car has to be submitted to the leasing company once the lease term expires.
Advantages of personal contract hire:
- No depreciation or disposal risk
- Fixed-term contract
- Pay only for use of the vehicle
- Flexible initial payment
- Fixed cost motoring
- Vehicle handed over to company once lease ends
- Fixed mileage contract
- Include maintenance of the contract (Optional)
Personal Lease Purchase (PLP)
Now, this is something different to the above-mentioned two car lease types. In the Personal lease purchase, you agree from the beginning that you will eventually purchase the vehicle. Initial deposit is required in the beginning of the lease coupled with monthly fixed amount payments that must be made through the agreed number of months.
The car lease company will calculate the monthly payment figure based on the vehicle’s retail value and the contract term and estimated value of the balloon payment that is made at the end of the contract term. It is a good choice if you want to acquire a car but doesn’t wish to pay up front.
Advantages of personal lease purchase
- VAT not imposed in monthly payments
- You own the vehicle after final balloon payment
- Low deposit and monthly payments
Commercial Car Leasing
The term “commercial car leasing” refers to the vehicles leased for commercial purposes. However, it is not always the case as many states classify the vehicles by weight. If the vehicle exceeds a certain weight limit, it is a commercial vehicle and hence commercial car lease should be applicable for the same.
Commercial vehicle leasing is so far the best way to equip your business with commercial vehicles (cars or trucks), it needs to operate. Along with helping offering the mobility to employees, commercial vehicle leasing proves to be a big asset to the business itself.
There are essentially two types of commercial leases.
It is considered as an expense to the lessee. The lessee assumes no ownership stake in the vehicle. Instead, the lessee is paying for the right to use them. Leased commercial vehicles remain the property of the leasing company or agent who in turn accrues the tax benefits involved. An operating lease lets businesses save on taxes as they are treated as operating expense and do not figure on the balance sheet.
Advantages of operating lease:
- It provides improved Return On Asset (ROA)
- No risk of obsolescence for lessee
- No need to include asset in the balance sheet
- Flexibility to companies that frequently update or replace their equipment
- Lease payments are optional expenses and hence are fully tax-deductible
In a capital lease, the lessee assumes a portion of the ownership of the leased vehicle. A lease can claim the depreciation of the vehicle and interest from payment on their annual tax form while the titles are still held by whoever owns them outright. With capital lease, a commercial vehicle is not considered an operating expense and must be placed on balance sheet.
- From lease payment, interest expense component can be deducted as an operational expense.
- Lessee can claim depreciation each year on the asset.
- Lessee owns a portion of the vehicle ownership.
Restrictions When You Lease a Vehicle
Along with the peace of mind of tax benefits and lower monthly payments, car lease agreements also bring some restrictions you need to bear in mind:
- No Modifications Allowed – During the lease period, you’re not allowed to modify the vehicle in any way as you’re not the actual owner of the vehicle. No changes can be made without permission, but you can ask the leasing company for modifications before you take it.
- Car Condition Monitored – When the lease agreement ends and when you plan to return the vehicle to the leasing company, you must make sure the car is in good repair and condition. You may be charged if any damage found by the leasing company. For example, if the wiper gets broken, you might be charged to cover the cost of putting this damage right.
- Car Mileage Monitored – Personal car lease comes with an agreed mileage, which means you’re not allowed to drive the vehicle after a certain number of miles. If you exceed the mileage, you’ll have to pay penalty for the extra miles when the lease term ends. Before you lease the vehicle, be sure to understand the cost of going over the mileage.
- Geographical Limits – Leased cars, just like the mileage restrictions, come with geographical restrictions too. So, if you plan to take the vehicle abroad, you might need a written permission from the leasing company.
Leasing a car vs buying:
The monthly payments are always lower for leasing than buying. However, leasing experience can be different to people, depending on their financial situation and how they feel about spending money.
Listed below are some of the major differences between buying and leasing.
- Ownership – As you know that leasing lets you drive the vehicle for a certain period of time with monthly payments but when you choose to buy, you own the vehicle and get to keep it as long as you want it.
- Up-front Costs – When leasing, it can include first month’s payment or a refundable amount. And when buying, it includes the down payment, registration cost, taxes, and other fees.
- Vehicle Return – Leased vehicle is returned to the leasing company and simply walk away but you may need to deal with selling or trading in your car when you purchase it.
- Mileage – Leased vehicle comes with mileage restrictions while you’re free to drive your purchased vehicle as many miles as you want.
- Monthly Payments – It’s relatively lower in the leased vehicle as you’re paying only for the vehicle’s depreciation during the lease term, while loan payments for purchased vehicles are usually higher and you’re paying off the entire purchase price of the vehicle with interest rate and taxes.
Once you understand the basics of personal or commercial car leasing and the differences between buying and leasing a car, it becomes a lot easier to know whether or not you’re really getting a good deal.