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Leasing a car is a convenient but costly affair

Want to drive a car without actually buying one, with the option of switching models every six months? You can do so by leasing a brand new car. Car makers are now offering new cars on lease for periods ranging from six to 60 months (five years), depending on the city and model selected. Car companies are looking for alternative options to improve car sales and reduce inventory in showrooms. According to the Society of Indian automobile manufacturers, car sales have dropped by 26 per cent in May compared to the same period last year.Image result for Leasing a car is a convenient but costly affair

Mahindra & Mahindra and Skoda have been allowing selected models on lease in India with minimal or no down payment.

In June 2019, Hyundai joined the bandwagon. Its entire car portfolio, which includes Santro, Grand i10, Elite i20, Verna and Creta, is now available on lease for individuals and companies.

According to Sunil Gupta, MD and CEO of car rental service provider Avis India, “The car leasing market in India is expected to expand at a compound annual growth rate (CAGR) of 15-20 per cent over the next ten years.”

Car makers are targeting salaried individuals, working professionals, small and medium enterprises, corporates and public sector consumers. In these categories, millennials are more focussed upon since they are more prone to changing cars every 3-5 years.

Gupta says, “At present, car leasing has a penetration of less than 1 per cent in India, mainly driven by corporates, while it is as high as 45 per cent in developed nations such as United States of America and Europe. We expect this to pick up now, driven by individual consumers since it offers convenience compared to buying a car and saves on maintenance costs.”

What’s on offer?

While leasing a car, you get to ride a brand new model from the manufacturer’s portfolio. For instance, you get Hyundai’s basic SUV, Creta, at a monthly rent of Rs 17,642 (including taxes). There is no down payment, and the lease is for a period of five years. The cost is inclusive of maintenance, which is done once in a quarter or after exceeding a specific number of kilometres as per the contract. Similarly, Mahindra and Mahindra offers its Sport utility vehicle (SUV) portfolio on lease at prices starting from Rs 13,499 to Rs 32,999 per month. The cost varies with the tenure of the lease, city and model selected. Once the lease tenure is over, the consumer can return the vehicle to the company, without the hassle of having to resell it, and get a new model.

The car leasing option is also available in premium car models of BMW and Skoda. These car makers have a lock-in of twelve months and lease can extend up to five years.

While taking a car on lease, you need to pay the first year’s insurance and first month’s rent. After one year, the monthly rental is reduced. However, during the lease tenure, you need to pay insurance costs to the car manufacturing company every year since they renew the policy for you.

There is a lock-in period while leasing the car. A Hyundai customer has to give a commitment to take the car on lease for at least 12 months. In case the customer returns the car before completing the lock-in period, the company asks for a penalty of Rs 20,000.

You can even opt to purchase the leased car from the company after the lock-in period of 12 months. The charges are disclosed in the contract.

There is a limit on the number of kilometres (kms) you are allowed to drive in a leased car. For instance, Hyundai allows 1,500 kms per month on each car models. If you exceed this limit, there is an additional cost of Rs 1.5/km levied for the next 1,500 kms (i.e., up to a total of 3,000 kms/month). If you exceed 3,000 kms in a month, you need to pay higher charges for extra kms driven, which will vary based on the car model.

Inforgraphic by: Ritesh Presswala

Leasing a costly affair?

Leasing may offer convenience to you, but let’s do the math to understand how the prices stack up when compared to a car purchased with an auto loan. The ex-showroom price of a Hyundai Grand i10 is Rs 4.98 lakh in Mumbai. According to Revv India’s website, it costs Rs 23,700 a month to lease a Hyundai Grand i10 (Petrol model) for the initial 12 months. After completing 12 months, the rent is reduced to Rs 14,500 a month.

If you decide to buy a car on loan for, say, a four-year tenure from HDFC bank at 9.25 per cent, you will pay Rs 11,206 a month as equated monthly instalment (EMI). Initially, you have to make a down payment of Rs 49,800 (i.e., 10 per cent of the ex-showroom price). After completing the four-year lease tenure you will end up paying Rs 8.06 lakh in all. With a car bought on loan your total outgo would be only Rs 5.89 lakh.

A BMW – 7 series (730Ld M sport) petrol model taken on lease in Mumbai costs Rs 2.78 lakh per month (excluding taxes). If you decide to purchase this car on loan at an interest rate of 13.75 per cent and a 48-month tenure, the cost of the car will be Rs 1.16 crore (approximately.). In the leasing option you will end up paying Rs 1.34 crore to the company at the end of tenure. The calculations for leasing and loan option for premium car are sourced from the portal mynewcar.in.

Buying a car with a loan is cheaper compared to the leasing option in the cases of mid-entry passenger cars and premium cars.

Amol Joshi, founder of financial advisory firm Plan Rupee Investment Services says, “After repaying the loan, you will be the owner of the car and can resell it in the market. So, you get to earn certain resale value of a car in case purchased on loan. In a leased car, you don’t have an option of resale.”

However, one of the drawbacks of buying a car is regular maintenance of the car as it gets older. Also, the cost may increase with passing years and you will feel the pinch in your pockets.

Benefits and pitfalls of leasing

The benefits of leasing include lower or no down payment on the car, a fixed EMI inclusive of maintenance cost and no hassle of reselling in the market. If you plan to keep the car for only 1-3 years, you can take the leasing option. You can own the new car by paying a relatively small amount to the car manufacturer.

Harshvardhan Roongta, Principal Financial Planner at Roongta Securities says, “Car leasing is also recommended to individuals/families on the move from one city to other with jobs of short tenure (one to three years). They will save on add-on costs, which include registration of the car with the regional transport office (RTO) and other miscellaneous charges while purchasing a car.”

Veejay Ram Nakra, Chief of Sales and Marketing, Automotive Division, Mahindra & Mahindra Ltd says, “Leasing is gaining acceptance in the market and offers greater convenience compared to actually owning a car. Customers also have the flexibility to upgrade their models and once the lease scheme is over, the person can return the car to the company and get a new car of her choice.”

While leasing a car you have to buy the motor insurance policy from the car maker and renew with them every year. A retail banker, requesting anonymity, says, “The cost of insurance is high on a leased car when compared to a purchased car. So, during the lease tenure you will end up paying higher premiums for car insurance.”

There are caps on kilometres allowed in a lease car in a month and if you exceed those, you are penalized by the company with additional costs as explained above. While buying a car, there is obviously no limit on the kilometres you can drive.

Sapna Tiwari, Co-Founder and COO, Rupeewiz Investment Advisors says, “While taking a car on loan, the monthly outflow through EMI will eventually end, but in car lease monthly payments won’t stop until the car is returned to the manufacturer.” Also, at the end of the car lease term, you own nothing.

To install any accessories in lease car you need to inform the company and get an email confirmation. Also, in case there is a damage to the car due to installation of accessories then you may have to bear that cost.

Moneycontrol’s take

Lease a car if you simply love to drive a new car every two to three years. Understand the costs and the contractual terms in depth.

But, the unpleasant truth is, leasing a car doesn’t seem the right choice, going by the example taken above wherein you end up paying a higher amount at the end of the tenure. Buying a car by saving for it or by taking a loan seems to be a relatively inexpensive option.