Vehicle leasing

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Vehicle leasing is the leasing (or the use) of a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring (or having the use of) vehicles for business, without the usually needed cash outlay. The key difference in a lease is that after the primary term (usually 2, 3 or 4 years) the vehicle has to either be returned to the leasing company or purchased for the residual value.

Contents

Rationale

Vehicle leasing offers advantages to both buyers and sellers. For the buyer, lease payments will usually be lower than payments on a car loan would be. In most states, any sales tax is due only on each monthly payment, rather than immediately on the entire purchase price as in the case of an instalment sale or loan. Some consumers may prefer leasing as it allows them to simply return a car and select a new model when the lease expires, allowing a consumer to drive a new vehicle every few years with no worries of having any negative equity upon turning their vehicle in unlike when one trades in a purchased vehicle after only 2 or 3 years of ownership. The lease vehicle is in theory always under factory warranty therefore the lessee doesn’t have to pay for repairs. A lessee does not have to worry about the future value of the vehicle, while a vehicle owner does. Almost all leases include a fixed purchase price at lease end so if the vehicle is worth more than the predicted value, the lessee can buy it but if it is worth less, the lessee can return it. For a business lessor there are tax advantages to be considered. The consumer lessee also pays less sales tax over the life of the lease than purchasing the vehicle.

For the seller, leasing generates income from a vehicle the seller (or manufacturing corporation or its finance subsidiary) still owns and will be able to lease again or sell through vehicle remarketing once the original (or primary) lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a dealer's business model. Also, lessees have greater loyalty to the same vehicle manufacturer than do buyers. [1]

Market penetration

Leasing's average retail market penetration rate in the United States for new passenger vehicles reached an all-time record high of 26.5% in February 2014. [2] This represents a recovery from a severe drop during the financial crisis of 2007–08. As of 2016, leasing accounted for about 25 percent of total vehicle sales and 31 percent retail sales in the United States. [3]

The prevalence of leasing in the United States for GM, Ford and Chrysler has risen close to the industry norm after reaching low single digits in 2009, but is still lower than BMW and Mercedes-Benz. [4]

Lease agreement

Lease agreements typically stipulate an early termination fee and limit the number of miles a lessee can drive (for passenger cars, a common number is 10,000 miles per annum though the amount can be stipulated by the customer and can be 5,000 to 25,000 miles per year). If the mileage allowance is exceeded, fees may apply. Dealers will typically allow a lessee to negotiate a higher mileage allowance, for a higher lease payment. Lease agreements usually specify how much wear on the vehicle is allowable, and the lessee may face a fee if that amount of wear has been exceeded. [5] A lease with maintenance (commonly known in the UK as Contract Hire) can include all vehicle running costs excluding fuel and insurance.

The actual lease payments are calculated in a very similar way to loan payments, but instead of an APR, the company uses something called the money factor.

At the end of a lease's term, the lessee must either return the vehicle to or buy it from the owner. The end of lease price is usually agreed upon when the lease is signed. [5]

Typically a leasing company will have a minimum length of lease such as 24 months up-to 60 months. Recently a new view on leasing is that the market has grown for short term lease called 'flexi-lease'. Flexi-lease is when a person can lease a new vehicle for 3 months and then choose to hand the car/van back or indeed extend the lease for another period. This is almost the same as van hire but typically involves the finance or leasing company maintaining and being ultimately responsible for the vehicle.

Some companies, such as AutoTT, offer what is known as a short term car lease in Europe. This product aims to provide a car lease free of VAT to non-european residents, the car being registered under the customer's name. The program is 50 years old and started with the French car makers Renault, Peugeot and Citroën. The offer includes a brand new car, full risk insurance and 24 hours assistance and is, in many ways, similar to a car rental. At the end of their stay, the car "owner" returns the car, and has nothing else to pay. [6] [7]

In the UK

Leasing a vehicle provides access to a vehicle that might otherwise be unaffordable as an outright purchase. Leasing may be beneficial if the plan is to change the vehicle at the end of the initial contract, rather than taking ownership. Vehicle leasing is available to both businesses and individuals in the UK. [8] The biggest difference between personal and business leases is that business leasing is VAT recoverable, so you can claim 100% of the VAT back if the vehicle is solely used for business use, or 50% if the car is used for both business and personal use. [9] In addition, leasing a fully electric vehicle (EV) or very efficient Hybrid vehicle for work can offer zero-emissions tax savings. In the 2022/23 UK tax year, company car tax for zero-emissions vehicles was as low as 2%. [10]

Market overview

In the UK the leasing market has historically been dominated by businesses and fleet customers. In recent years however the market has shifted and now personal contracts have the biggest market share. This is largely influenced by increasing company car tax for drivers (BIK) and taxable allowances for businesses being affected by vehicle emissions. For company car users who opt out, a personal lease contract allows them to have a fixed monthly payment that's subsidised by their employer, but also allows for a more flexible choice of vehicles than a rigid company car policy. This is not to be confused with salary sacrifice, in which employers offer car leasing to employees using their pre-tax income. [11]

In the Netherlands

Company lease vehicles are available in the Netherlands. Companies may lease vehicles to their employees for business trips. [12]

Criticism

Company cars for employee use

In some countries, companies may lease vehicles not just for their top managers, but rather all their employees (regardless on whether they actually need the car for business trips, or even any company tasks). This adds to traffic congestion [13] There are sometimes tax benefits (tax deductions and depreciation write-offs) to the employers by giving a car instead of a raise or a bonus. [14] Transport and Environment has stated that Europe is subsidising pollution and climate change in this way. [15] Alternatives such as remote work can (in certain cases) be used to reduce the use of vehicles for transport between work and home, however, and a modal shift towards non-motorized transport (i.e. cycling, ...) can also help to curb pollution and traffic congestion. In instances where physical presence at the workplace is necessary, and non-motorized transport (cycling, ...) is not an option (i.e. too great a distance between home and work) and where public transport is not convenient either (no direct routes or long waiting time), corporate car sharing may be an option.

See also

Related Research Articles

<span class="mw-page-title-main">Renting</span> Payment for temporary use; hiring

Renting, also known as hiring or letting, is an agreement where a payment is made for the use of a good, service or property owned by another over a fixed period of time. To maintain such an agreement, a rental agreement is signed to establish the roles and expectations of both the tenant and landlord. There are many different types of leases. The type and terms of a lease are decided by the landlord and agreed upon by the renting tenant.

<span class="mw-page-title-main">Car dealerships in the United States</span>

In the United States, a car dealership is a business that sells cars. A car dealership can either be a franchised dealership selling new and used cars, or a used car dealership, selling only used cars. In most cases, dealerships provide car maintenance and repair services as well as trade-in, leasing, and financing options for customers.

<span class="mw-page-title-main">Lease</span> Contractual agreement in which an assets owner lets someone else use it in exchange for payment

A lease is a contractual arrangement calling for the user to pay the owner for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial or business equipment are also leased. In essence, a lease agreement is a contract between two parties: the lessor and the lessee. The lessor is the legal owner of the asset, while the lessee obtains the right to use the asset in return for regular rental payments. The lessee also agrees to abide by various conditions regarding their use of the property or equipment. For example, a person leasing a car may agree to the condition that the car will only be used for personal use.

An invoice, bill or tab is a commercial document issued by a seller to a buyer relating to a sale transaction and indicating the products, quantities, and agreed-upon prices for products or services the seller had provided the buyer.

<span class="mw-page-title-main">Knock-down kit</span> Collection of manufactured parts for assembly

A knock-down kit is a collection of parts required to assemble a product. The parts are typically manufactured in one country or region, and then exported to another country or region for final assembly. CBU, on the other hand, stands for "Completely Built Up" and signifies import of a finished product.

A rental agreement is a contract of rental, usually written, between the owner of a property and a renter who desires to have temporary possession of the property; it is distinguished from a lease, which is more typically for a fixed term. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term. The owner of the property may be referred to as the lessor and the renter as the lessee.

Closed-end leasing is a contract-based system governed by law in the U.S. and Canada. It allows a person the use of property for a fixed term, and the right to buy that property for the agreed residual value when the term expires.

Aircraft leases are leases used by airlines and other aircraft operators. Airlines lease aircraft from other airlines or leasing companies for two main reasons: to operate aircraft without the financial burden of buying them, as well as to provide temporary increase in capacity. The industry has two main leasing types: wet-leasing, which is normally used for short-term leasing, and dry-leasing which is more normal for longer-term leases. The industry also uses combinations of wet and dry. For example, when the aircraft is wet-leased to establish new services, then as the airline's flight or cabin crews become trained, they can be switched to a dry lease. In some markets, there may also be hybrid models, such as with crew provided by lessees.

<span class="mw-page-title-main">Rent-to-own</span> Type of transaction

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<span class="mw-page-title-main">Auto auction</span> Selling auto vehicle

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<span class="mw-page-title-main">Car finance</span> Financial products enabling ownership of a car

Car finance refers to the various financial products which allow someone to acquire a car, including car loans and leases.

Personal contract purchase (PCP), often referred to as a personal contract plan, is a form of hire purchase vehicle finance for individual purchasers, similar to both personal contract hire and a traditional hire purchase.

<span class="mw-page-title-main">Government incentives for plug-in electric vehicles</span>

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Vehicle insurance in the United States is designed to cover the risk of financial liability or the loss of a motor vehicle that the owner may face if their vehicle is involved in a collision that results in property or physical damage. Most states require a motor vehicle owner to carry some minimum level of liability insurance. States that do not require the vehicle owner to carry car insurance include Virginia, where an uninsured motor vehicle fee may be paid to the state, New Hampshire, and Mississippi, which offers vehicle owners the option to post cash bonds. The privileges and immunities clause of Article IV of the U.S. Constitution protects the rights of citizens in each respective state when traveling to another. A motor vehicle owner typically pays insurers a monthly or yearly fee, often called an insurance premium. The insurance premium a motor vehicle owner pays is usually determined by a variety of factors including the type of covered vehicle, marital status, credit score, whether the driver rents or owns a home, the age and gender of any covered drivers, their driving history, and the location where the vehicle is primarily driven and stored. Most insurance companies will increase insurance premium rates based on these factors and offer discounts less frequently.

<span class="mw-page-title-main">RCI Banque</span> France-based finance company

RCI Banque SA, trading as Mobilize Financial Services, is a France-based international company that is a wholly owned subsidiary of Renault and part of Renault's Mobilize unit. RCI Banque specialises in automotive financing, insurance, and related activities for the Renault group brands globally for the Nissan group brands in Europe, Russia, Asia and South America; and for Mitsubishi Motors in the Netherlands.

<span class="mw-page-title-main">Ijarah</span> Term of Fiqh in Islamic banking

Ijarah,, is a term of fiqh and product in Islamic banking and finance. In traditional fiqh, it means a contract for the hiring of persons or renting/leasing of the services or the “usufruct” of a property, generally for a fixed period and price. In hiring, the employer is called musta’jir, while the employee is called ajir. Ijarah need not lead to purchase. In conventional leasing an "operating lease" does not end in a change of ownership, nor does the type of ijarah known as al-ijarah (tashghiliyah).

References

  1. ↑ "Automobile Lending and Leasing Manual".
  2. ↑ "J.D. Power Reports: Auto Buyers Are Committing To Leasing And Long-Term Loans At Record Levels". J.D. Power, McGraw Hill Education. 2014-02-06. Retrieved 2015-02-20.
  3. ↑ Popely, Rick (30 Mar 2017). "Glut of off-lease cars makes it good time to buy used". The Detroit News. Retrieved 24 April 2017.
  4. ↑ "2014 Used Car MarketReport" (PDF). Manheim Consulting. p. 24. Retrieved 2015-02-20.
  5. 1 2 Aston, Sam (2024-02-21). "Understanding Vehicle Leasing Terms and Conditions" . Retrieved 2024-02-21.
  6. ↑ "Achat d'un véhicule, lors d'un séjour temporaire en France".
  7. ↑ "Short Term Lease - RenaultUSA | Auto-TT - Renault Eurodrive | Auto-TT".
  8. ↑ "UK Vehicle Leasing Explained | Commercial Vehicle Contracts Ltd". Commercial Vehicle Contracts. Retrieved 2022-04-21.
  9. ↑ "LeaseLoco - The UK's Biggest Car Lease Comparison Site". www.leaseloco.com. Retrieved 2022-07-21.
  10. ↑ "Planet Leasing - What are the tax benefits of leasing a car for business?". www.planetleasing.co.uk. Retrieved 2023-06-26.
  11. ↑ "LeaseLoco - The UK's Biggest Car Lease Comparison Site". www.leaseloco.com. Retrieved 2022-07-21.
  12. ↑ Company lease vehicles
  13. ↑ "Five reasons Belgium has the worst traffic in Europe". The Guardian . 2014-08-28. Archived from the original on 2023-04-04.
  14. ↑ "Five reasons Belgium has the worst traffic in Europe". The Guardian . 2014-08-28. Archived from the original on 2023-04-04.
  15. ↑ Company cars: how Europeans are subsidising pollution and climate change
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