UPDATING your fleet or considering replacing your own business vehicle?
Do you buy or lease? You need to review your options carefully: is leasing better than buying before making your final decision.
Leasing instead of buying has many advantages over traditional hire purchase agreements.
Should a business buy or lease a vehicle?
If you are wondering which option makes more sense, then let’s take an example of a car with a £30,000 price tag, purchased or leased over a standard three-year term.
Assume that both interest rates for buying and leasing are the same, at 6% and that you will be driving the industry standard of 10,000 miles per year.
The primary benefit of leasing over buying your next vehicle is the monthly expenses. A buyer will have a monthly payment of £700, while lease will be £560.
This is a massive difference in monthly payments and the lease wins hands down, saving £140 a month. That is almost a quarter the cost of the monthly payments on the car.
The reason for the huge difference between the payments is the fact that with a lease you are only paying off the depreciation of the vehicle, not the total vehicle cost.
Lease agreements generally have more favorable terms for down payments than buying outright. Leasing a car requires only a down payment of usually three monthly rentals in advance – sometimes less – which is why this option has become so popular.
Who qualifies for business car leasing?
An important factor when thinking of a lease is the amount of miles you cover annually. Lease agreements will generally tie you into a certain mileage, such as 10,000 miles per year.
If you drive more than that then you will be liable for a penalty fee for each mile you drive over the set allowance.
The penalty is not massive, at around 10 to 15p per mile, however, you should try to keep within the range if you can. While this may sound like a negative for a lease, you should take into account that if you buy a car you will be penalised when trading in if the mileage is too high.
Wear and tear fees are also written into every lease agreement and you will be penalised for any dings, dents, and scratches. These fees can equate to up to three months lease payments.
Why are business car leases cheaper?
With a lease, you will be able to claim some of the car’s depreciation and financing costs against tax, as well as other expenses related to fuelling and servicing the vehicle.
Interest on loans when buying a car are not deductible in the same manner as a lease.
The amount of miles you cover should be a factor to consider when applying for a lease.
If you have no intention to own the car in the future and will be simply exchanging it for a new one on a new lease, then leasing wins hands down.
Using a leasing agent that has a positive market reputation. Take a look at our sister site Leasing Broker Federation
One finance product you might want to consider for your next business car is lease purchase – particularly if your business in non-VAT registered.
In many ways lease purchase is very similar to hire purchase – except that you pay lower monthly repayments followed by one final payment at the end of the agreement.
This final payment – often referred to as a ‘balloon’ – pays off the final amount owing which will have been agreed at the start.
Unlike contract purchase or personal contract purchase, where you can decide to pay the final amount or not, with a lease purchase agreement you must pay that final balloon.
It might help to pay lower payments at first knowing that later on, as business increases, you can afford the final deferred payment.
Or you might want to reduce the monthly payments further by putting down a greater deposit at the start.
You see, flexibility is key to lease purchase, and at the end of the agreement, once you’ve paid that final amount owing, you are free to keep the car as long as you want, or sell it of course!
If that final amount has been calculated correctly to reflect the expected car’s value, then if you sell it, you won’t be out of pocket.
The car you buy will be shown on your books as an asset, and can be written down against profits in the normal way.
What are the disadvantages of lease purchase?
You must pay the final amount at the end of the agreement – if you can’t find the full sum, then you can always agree a secondary finance agreement that pays it off.
But you must pay it off.
You are also subject to volatility in the used car market. If values weaken and the car becomes worth less than the agreed final amount, you will have to find the shortfall if you planned to sell it to cover the final amount.
But overall, lease purchase is a highly flexible way to get the car that you want on monthly payments that fit in with your company’s cash flow.