In a previous blog, we discussed the 7 advantages of leasing vehicles for your fleet that outweigh the disadvantages, however, in this article we are exploring the option of leasing vs buying a car for your fleet.
Lease or buy a vehicle: What's the better option?
One of the perennial questions faced by businesses and individuals alike, to which everyone seems to have an opinion, is when intending to acquire a new vehicle, how should you pay for it? The advantage of leasing appears to be improved cash flow. This alone is, however, only but one of the considerations, there is a lot more to consider before a decision is made.
Outright purchase versus a lease: the fundamentals.
If you buy a vehicle with the intention of owning the vehicle, then you would either purchase using cash on hand or take out a loan, bearing in mind a bank-facilitated loan may have a condition whereby you are required to pay a deposit. The intention under the option of purchasing a vehicle outright or financing the total value under a loan is to own the vehicle. If you take into account the compounding effect of interest on a loan, then you will in all likelihood pay more than the stated interest over a period. With the cash option, the opportunity cost of the capital used to purchase a depreciating asset like a vehicle versus the return that could be achieved if the cash was deployed into your business must also be considered.
If you decide to lease the same vehicle, you will not be required to part with your cash or use your existing credit line with your bank. Your monthly rental covers the depreciation and interest as well as the maintenance, tyres, roadside assistance membership, vehicle licence, and registration. The financial portion of a lease includes a residual value that you are not responsible for. The risk of attaining the residual at the end of the lease remains with the leasing company.
In short, you only pay for the use of the vehicle as opposed to incurring the total cost of ownership.
Consider a three-year lease on a R100 000 vehicle, with an anticipated market value (residual value) of R45,000. The financial portion of the lease is the difference between the purchase price and the residual value, including interest on the total value. Financing R55, 000 is going to have a lower monthly payment than financing R100 000, even with a shorter lease term. This is the basic reason lease payments are lower than loan payments.
Since leases are generally between two and four years, the vehicles are almost always going to be fully covered by the manufacturer’s warranties. These are the best years of a vehicle's life. Once the lease is up, the vehicle is collected and you then enter a new lease contract for a new vehicle. You will have secured peace of mind.
On the other hand, if you took out a five-year loan to purchase the vehicle outright, your monthly payments would stop after five years. It would be only a matter of time before the break-even point was reached.
When determining which method is best suited to your requirements, you will need to consider a few elements like the monthly cash flow, intention to own, and the number of payments. In addition, you should consider more than just the difference between monthly payment amounts and the length of payments. Over longer periods of time, the vehicle will incur more costs for maintenance and servicing with a higher incidence of repairs. The cost to maintain, service, and repair the vehicle over the life cycle will need to be factored into the equation.
The trade-off:
- With leasing, you will pay a lower monthly payment and have very few concerns about reliability.
- With an outright purchase, you're going to come out ahead if you can commit to proper maintenance and resist the urge to constantly upgrade.
Sale and Leaseback
Through a sale and leaseback transaction, you gain a possible cash injection and immediate control over your vehicles.
This form of financing allows owners to sell their vehicles and immediately lease them back from the buyers, unlocking capital that can then be deployed in more productive ways:
- Reinvesting into existing operations
- Financing growth and/or expansion plans
- Making an acquisition
- Paying down debt
- Engaging in investment diversification strategies (long-term estate planning)
- Reallocating capital into more productive uses
Total Cost of Ownership
The purchase price of a vehicle plus the costs of operation over its economic life, is the total cost of ownership. When choosing among alternatives in a purchasing decision, buyers should look, not just at an item's short-term price, which is its purchase price, but also at its long-term price, which is its total cost of ownership.
The item with the lower total cost of ownership will be the better value in the long run. The additional costs you may not have included when considering your next vehicle purchase include depreciation, interest on your loan, taxes and fees, insurance premiums, fuel costs, maintenance, and repairs.
The total cost of ownership will be influenced by a number of factors including selecting a vehicle “fit for purpose”, operating conditions, driver behaviour, and attitude. If these factors are not properly controlled the total cost of ownership can easily skyrocket.
As can be seen, the decision to lease or buy a vehicle may be complex, especially for fleet managers. It will be in your best interest to engage with the experts at one of the fleet management companies before decisions, with long-term bearings, are made.
Typical fleet management profit allocation:
Benefits of leasing
Tying up large amounts of cash in depreciating assets with unpredictable maintenance and running costs is not smart. Leasing can be a smarter choice for businesses and employees - reducing negative impacts on cashflow, removing exposure to depreciation, increasing tax effectiveness and delivering discounts on operating costs.
- Lower monthly payments
- Cost certainty and stability
- Assured vehicle maintenance
- Lower upfront cash outlay
- No used-car hassles
Vehicle fleet management with EQSTRA Fleet Management will control costs and minimise the risks associated with vehicle ownership to improve efficiency, productivity, and reduce overall mobility budgets.
We also assist with compliance, advising on Company Car Policies in terms of safety, policies, and taxation.
Leasing is the best option if you:
- Enjoy driving a new car every two or three years.
- Want lower monthly payments.
- Like having a car that has the latest safety features and is always under warranty.
- Drive an average number of kilometres annually and
- Want to properly maintain your vehicle or fleet of vehicles.
Still feeling unsure on what option is best for your company? Contact our team of experts today.
Whether you buy or lease, you will need a vehicle logbook when claiming against a travel allowance for the year. Without one, it will not be possible to claim a travel allowance, download our free travel logbook for your fleet.
