The road test
The company car is an integral component of virtually every business; as a result the need for a reliable, effective and cost-efficient solution is a vital element for organisations of all sizes.
But when sourcing a car, what is the best way to finance it? Should you go for one of the many car lease deals or purchase a car outright?
These are two very different ways of financing a vehicle. Buying outright (whether with or without a loan) finances the purchase of a vehicle, while leasing finances the use of a vehicle. Each has its own advantages and disadvantages, depending on your requirements.
Before you begin to consider your options, you need to be aware of two important elements:
Depreciation: the reduction in the car’s value as a direct result of the make and model, age, mileage and condition.
Residual Value: the predicted value of a car when it reaches the end of the lease agreement.
With this in mind and to help you make a more informed decision, we decided to take a closer inspection of the different mechanics of leasing versus outright purchase and see which of these options came out on top:
- Initial outlay
- Monthly cash flow
- Peace of mind
1. Initial outlay
When leasing a car there’s no large initial outlay, just an initial payment followed by a set number of fixed monthly fees, which typically range between 12 and 48 months. The initial payment for lease cars can vary depending on your requirement but on average is only three times the monthly payments, which are also generally lower than the monthly repayments on a loan.
By avoiding paying the full cost of a vehicle upfront you can put this money to better use somewhere it’s more needed, while you spread the cost of financing the car over time, matching the expense to the use of the car.
Car lease 1. Outright purchase 0.
2. Monthly cash flow
Monthly lease payments consist of two parts: a depreciation charge and a finance charge. The depreciation charge of each monthly payment pays the leasing company for the portion of the vehicle’s value that is lost over the leasing period. The finance charge covers the interest on the money the leasing company has invested in the car while you’re driving it, so you repay this part of that money in monthly payments.
Loan payments also have two parts: a principal charge and a finance charge. A loan company or bank provides the money either directly to you or a dealer, and you repay that money with interest, over a pre-agreed period. The principal charge pays off the full vehicle purchase price over the length of the loan, while finance charge covers the loan interest on the monthly unpaid balance.
As a result, the fixed monthly payments with a lease only have to cover the depreciation (the difference between the purchase price and the residual value) so are lower than the cost of financing a vehicle for purchase, so from a cash flow point of view, leasing a vehicle is a far better solution.
Car lease 2. Outright purchase 0.
The value of a new vehicle is on a steep decline from the moment you drive it out of the showroom. With vehicle depreciation levels extremely high, leasing a car helps you to avoid any nasty shocks when it comes to selling up and reinvesting in a new model.
For example, if you lease a £20,000 car that has an estimated resale value of £13,000 after 24 months, you only pay for the £7000 difference (the depreciation), plus finance charges and fees. You either return the car at the end of the lease or may be able to buy it for a pre-agreed amount. When you purchase outright, you pay the entire £20,000, plus any finance charges and fees. You will own the car at the end of the loan period, although its value is £7,000 less than the £20,000 you paid initially.
The problem is forecasting this depreciation. A contract hire agreement means that the leasing company bears the risk of forecasting the car’s future value, together with the maintenance cost risk if included. As a result all agreed costs are fixed from the onset so there are no unpleasant surprises during or at the end of the leasing period.
Car lease 3. Outright purchase 0.
With its residuals, money factors, acquisition fees, etc. leasing is a little more complicated than a simple loan. As a result, leasing requires that you be more informed and why you should always use a professional leasing company with a successful track record who can make leasing as easy and understandable as possible for you.
Car lease 3. Outright purchase 1.
5. Peace of mind
Car lease packages have long including road tax, maintenance, servicing and tyre replacement; as a result there are no unforeseen hidden costs, helping your budgeting and cash flow.
In the event of a breakdown, recovery services will be provided to get the driver back on the road as soon as possible. Likewise in the unfortunate event of an accident, accident management services help to manage the process and handle the administration involved in making a claim and repair of the vehicle.
Car lease 4. Outright purchase 1.
Should you need to return a leased vehicle before the end of the contracted period, then you will be obliged to pay early termination fees. Whereas if you own the vehicle outright, you could simply sell it and recoup some of your initial outlay.
Car lease 4. Outright purchase 2.
7. Purchasing power
One recognised benefit of leasing is the ability to be able to leverage the purchasing power of a fleet buyer. Allowing you to reduce costs or get a better spec of car for your money, giving your employees a greater comfort or performance and making everyone happy.
Car lease 5. Outright purchase 2.
Buy outright and it will be up to you to source the vehicle, manage all maintenance and repairs, renew the annual excise duty and when it comes to selling it, find a buyer and negotiate the price.
When you lease a car the leasing company will do all this for you and as a result cut out a huge amount of administration.
Car lease 6. Outright purchase 2.
Without going into too much detail, the savings from taxation such as VAT and capital allowance weigh heavily in favour of leasing.
For the full lowdown on exactly how much you can save by leasing, just ask your accountant!
Car lease 7. Outright purchase 2.
Car lease 7. Outright purchase 2.
The result speaks for itself. From the financial advantages to the overall peace of mind; car leasing is the far better option both for the person holding the purse strings and for the person who holds the steering wheel.
To quote J.Paul Getty, the billionaire oil tycoon, “If it appreciates, buy it. If it depreciates, lease it.”
For a no obligation discussion about your financing requirements, please contact us.