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Tata Capital > Blog > Equipment Lease > 5 things to consider before leasing a car

Equipment Lease

5 things to consider before leasing a car

5 things to consider before leasing a car

Do you want your leadership to own the latest cars and travel in style without being bogged down by maintenance and liquidation concerns at the end of the asset's lifetime? Leasing can be a lucrative option.

Car leasing involves lower monthly payments, limited upfront capital investment, and an option to upgrade to the latest car frequently without worrying about asset disposal.

Leasing is a financing option wherein the lessor, the car owner, allows the lessee to utilise the car for a specified period in exchange for lease rentals.

Leasing can be further classified into two categories – Finance lease and operational lease. A finance lease is a long-term agreement that transfers the car's ownership at the end of the lease term. In contrast, the operating lease is a short-term agreement in which the lessee will either return the vehicle or purchase the car at the prevailing market price at the end of the lease term.

Leasing is convenient, affordable, and lucrative to drive the latest car without investing large sums upfront. While it offers countless perks, it is essential to understand some crucial aspects before finalising the lease.

Here are some factors to consider before leasing a car:

Lease Specials

Lease Specials are discounted leases to boost car sales. To increase sales, car manufacturers periodically offer lease specials on new cars, resulting in substantial savings for the customer.

Lease Special offers vary across different brands and car models. It is vital to understand the available proposals on the different car models to optimise the cost of leasing.

However, it is recommended to check for hidden costs such as sales tax or registration fees before making the final decision. Reach out to Tata capital's leasing team experts to make the right choice between leasing alternatives and offers.

Vehicle cost

Knowing the cost of the vehicle is of immense importance to understand the amount to be paid during the lease tenure. Cheaper cars tend to have lower monthly outflows as compared to the expensive ones.

Also, this decision needs to be based on the financial position of an individual to meet the monthly lease obligation on the leased car. Assessment of available cash flows is crucial to make an appropriate choice and to avoid late payment on lease rentals.

Vehicle residual value

The vehicle's residual value reflects the car's value at the end of the lease term. The residual value of the leased vehicles is expressed as a percentage of the vehicle manufacturer's suggested retail price (MSRP). The higher the residual value, the lower is the monthly lease rental as the monthly lease payment is based on the difference between the selling price and the residual value.

For instance, for a 3-year lease of an Rs. 10 lakh MSRP vehicle with 60% residual value, the monthly lease rental approximately is Rs. 11,111/-.

Residual value = 10 lakh * 60% = Rs. 6 lakhs after 3 years.

Monthly lease rental= Rs. 4 lakhs/36 months = Rs.11,111.

Alternatively, if the residual value is low, then it will result in a higher monthly cost. Choose an option with a higher residual value to reduce the monthly lease rental outflows.

Lease Miles per year

Every lease contract specifies the allowable miles during the contract, and most of the car leases range between 10000-15000 miles/year. Also, car manufacturers will clearly state the cost per mile beyond the total miles allowed during the lease term.

Calculate the average distance usually travelled per month and multiply by 12 to determine the miles covered. Choose an appropriate lease option to avoid paying extra charges for exceeding the permissible miles count.

End of Lease options

It is of immense importance to understand the end of lease options before signing a lease contract. The lessee can either return the car, renew the agreement or purchase the vehicle at the end of the lease period. Returning the car option shall be chosen only when the lessee can take care of the regular upkeep and maintenance. The renewal option will require going through credit checks as lessors would assess the lessee's financial position. Purchasing option should be exercised if the car is vital for the conduct and continuity of business operations.

Leasing a car is an attractive option to drive a brand-new car with the latest features and technology without investing considerable capital reserves into acquiring vehicles. Instead, companies can increase return on equity by investing funds in the core areas of business or more lucrative investment avenues. At Tata Capital, we offer a variety of leasing structures to meet the requirements of businesses to obtain low-cost car leases. Reach out to our leasing experts for guidance on our range of diverse leasing solutions.

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