Rent versus buy versus lease for Vehicles

Owning a house, a car or any other valuable thing could be a dream for many. When we dream about something, all our efforts are concentrated in that direction. Happiness coupled with contentment are bound to overwhelm us when any such dream gets accomplished. There was a time when buying a car was considered a big thing. The roads were not that busy and only a few companies were dominant in the market. To have an Ambassador, a Fiat-Premier Padmini or a Maruti was apparently a matter of pride. Similarly Bajaj and TVS were the most popular two wheeler brands.

We live in a different world now and the roads are always busy. In fact the roads are flooding with vehicles of all kinds. Many Indian as well as foreign car/two wheeler models are easily available. It surely makes us think about the make and model of the vehicle before owning it.Spread of CoronaVirus has forced a common man to also think about an alternative to public transport. Buying does not need any explanation and it can be financed by banks and other financial institutions. But it is not the only option. There comes the need to choose between renting, buying or leasing a vehicle. Once you buy a vehicle, all you need to do is to maintain it a little and use it whenever you want. Renting and leasing are relatively new concepts and they too are getting popular due to varied reasons.

Those with a two or a four wheeler license, prefer to rent a vehicle while visiting a distant place where they cannot take their own vehicles. We need not own a vehicle when we want to simply use it for a while as per our convenience.

It is important to review the decision to buy, rent or lease a vehicle as the money you spend could be more or less affected by your decision. Also when you have your own business, this decision will impact your income differently. Let’s explore all of these options in detail:

Buying vs renting a vehicle

You enjoy a few benefits when you own your vehicle-

• The vehicle is easily accessible. You can instantly use it and there is no booking or waiting time. The kind of comfort that you get from your own vehicle is unique. It is compromised when you get hired one. The hired vehicles are meant to appeal to the majority of the customers hence they do not fit an individual’s choice.
• The feeling of accomplishment by owning and driving a vehicle is unmatched.
• Travel plans get a lot easier with your own vehicle. In case of an emergency, your own vehicle will save you a lot of time and effort.
• With old age people and kids at home, having a four wheeler is like a blessing as it provides convenience and comfort when they want to go out. Women too feel safer when they drive their own car instead of riding a hired one.
• In the case of a bike, renting is not a good option if you want to use it for a long time. Rentals cost more than EMI. If you take a loan to purchase a bike, it has some residual value after you pay up the loan. Rental bikes have no such value. The same holds true even in case of cars. You have the right to transfer or sell your vehicle after becoming an owner.
• Rentals come with conditions like there is a monthly usage limit for a bike, they are not in the best condition and a high GST which is not disclosed upfront. There are no mileage limits when the vehicle belongs to you.
• The companies offering rented vehicles have to cover many costs. Rentals are costlier than EMI.

But buying a vehicle means you have to be ready for a bigger down payment, high EMIs and long term maintenance costs.

When you get a rented vehicle,

• You end up paying the cost of using it at the rate fixed per kilometer. There is no fixed cost or maintenance cost to be incurred out of your pocket.
• Getting a parking slot is a huge issue nowadays, especially in the case of a car. When you hire a car, you have to simply step out of the car without any parking hassles.
• You are free to make calls or check your emails or have a glance at other pending tasks while riding a hired car. The driver picks you up and drops you off at the desired destination, without you worrying about the directions and the traffic. It saves you from the anxiety and tiredness, lets you focus better once you reach the destination.
• There are bike enthusiasts who find renting a bike more attractive than buying one. You can get whichever bike you like to ride. The places where you don’t find many options to travel, you can hire a bike and travel up to a place where you can get another vehicle.
• It is advisable to get a rented bike or a car when you are unsure about living in a place for a longer duration.
• When you cannot afford to pay the down payment and/or instalments of a loan, it is wise to get a rented vehicle rather than considering a long term financial obligation.
• When you own a vehicle but change cities frequently, a vehicle registered in one state will require a re-registration or you will end up paying a fine. Renting a vehicle can be the best thing to do in that case.
• When you do not want to use your own car while travelling or when you are unable to take it there, renting is the only option. Sometimes you need a tougher or big car because of the type of road trip you have chosen and your own car could be a misfit for the rough journey, hiring a car is the only choice left for you.

However using a rented vehicle too has its own set of disbenefits:

• It allows the use of the vehicle for limited mileage.
• You need to know the rules if you hire a car in a new country.
• It is required to go through the insurance related matters before hiring the vehicle as it may put you in trouble.
• In the event of an accident or a dent, mostly the user is held responsible.
• The rental companies charge for a tank-full of petrol. You may not be able to use the petrol during your travel. There could be a refund but there are other service charges too for which you cannot get any refund.
• Sometimes you end up getting a model which you do not like much due to the last minute bookings or rush during vacations. You have to compromise though you are ready to pay for an upgraded or latest model.

Lease for vehicles: Leasing a vehicle is again an option which means nothing but renting it from the dealer for a certain length of time. The user does not have ownership over the vehicle. When you find buying a vehicle to be expensive, you can lease it for a specific period and pay for the time you use it thereby reducing the cost of maintenance.

How does leasing work?Here is the list of the features and benefits available under this option-

• You can own a vehicle without actually buying it.
• Regular payments should be made during the lease period.
• At the end of the leasing period, the lessor may allow the user to purchase the vehicle at the prevailing market rate. There could be conditions while doing so.
• You can avoid making a down payment.
• The lease rental is inclusive of all the maintenance costs. It is done by the company that owns the vehicle. There are no other costs for taxes and insurance. The instalments paid for using it usually cover the insurance against thefts, accidents etc.
• The lease plans are usually ranging from two to five years. The user pays for the usage only for the period during which he/she uses the vehicle. The period of lease is predetermined. At the end of this period, the vehicle can be handed over to the company.
• The user gets lucky in terms of driving a vehicle that is brand new, thus performance is guaranteed. If you like to change the model of your vehicle frequently, this could be a good option for you. Maintenance costs too are avoided as the user is not responsible for it. You can choose from a wide variety of available models.
• A tax saving of as high as 30% is possible for both salaried and self-employed individuals.
• You do not have to worry about reselling it.
• Registration costs with the regional office and other miscellaneous charges while purchasing a car are saved.

Drawbacks of leasing a vehicle-

• Leasing is not that popular in India especially for motorbikes.
• Lease rentals also need to be paid regularly and you must be able to afford it.
• Leasing is an option only when buying the vehicle is costlier. Compare the EMI value with lease rentals and then decide.
• Tax benefits could be attractive (for cars) but that should not become the sole reason to go for it.
• Lease rentals also need a good credit score just like loans.
• It is not easy to end the lease rental before the fixed time. There could be additional costs involved when you end it early.
• There is a mileage limit on a leased vehicle. If the lessee exceeds this limit, he/she has to pay extra money.
• The minimum lease period is two years in case of a car. If you want to get a vehicle for a lesser time than this, the option does not serve the purpose.
• There is a limited area within which the vehicle can run. Crossing the state border needs the company’s prior approval.
• The fuel costs are to be borne by the user.
• The monthly rent for shorter periods is very costly.
• You have to renew the insurance policy every year and the costs of insurance are usually higher for a leased car. One ends up paying higher premiums for car insurance.
• In case of an owned car, the EMIs will eventually stop after the loan tenure is over, but in case of a leased car the rentals will not stop until the vehicle is returned to the owner.

With the help of figures we can compare which is the best option in monetary terms-

When you get a regular car in India within a price range of Rs.7 to 8 lakh and get a loan worth Rs. 6 lakh:

Amount of a car loan Rs. 6,00,000

Interest on car loan 8%

Tenure of loan 5 years

Amount of EMI Rs.12,166

Total loan amount repaid Rs.7,29,960

Mileage of the car 12kmpl

Cost of fuel(petrol/km) Rs.8.33/km (Rs.100/12km)

Monthly average distance travelled 1500 km/month

Total cost of fuel Rs.7,50,000 (Rs.8.33*1500km*60 months)

Cost of maintenance and insurance Rs.1,50,000 (Rs.30,000*5 years)

Value of vehicle after 5 years @ 20% Rs. 2,45,760

Written down depreciation

Total cost of owning a car Rs.13,84,200

Cost of renting a car

Cost per km of a similar rented car Rs.15

Average distance travelled in a month 1500

Cost of renting a car for a month Rs.22,500

Cost of renting a car for 5 years Rs.13,50,000

Cost of a leased car

Monthly payment for a leased car in a big city Rs 21000 per month( the lease rentals are usually higher for the first 12 months and they cost less for a period of 48 months)

Leased car cost for 5 years Rs21,000*12months*5years=Rs.12,60,000

(These figures are based on a general analysis of prevailing rates for the same model)

Apparently leasing looks like a slightly cheaper option However, it will have a cap on mileage per month. Any usage beyond this limit could result in an additional charge. The cost of insurance will be higher in case of a leased car. If you do not purchase the vehicle, then you have to continue paying its rental which will be ultimately costly in a longer run.

Comparison Chart

Tax treatment of the vehicle for a Salaried individual and a businessman

There is a difference between the treatment of cost of the vehicle in case of a salaried individual and a businessman. Even if a salaried individual gets a car allowance, that shall be a taxable perquisite. If he/she uses it for personal purposes it shall be liable to tax. In case of a business person, when he claims depreciation for the car/two wheeler considering it as an asset, that becomes an allowable expense under section 32(1) of the Income Tax Act. Furthermore, when the vehicle (whether being a car or a motorbike) is fully used for business purposes, one can claim all the ancillary costs like petrol, wear and tear, insurance etc. by charging them against income in the profit and loss account. But if it is used for personal purposes, then the expense shall be disallowed.

1.Salaried employee:

1. If the car is provided/leased by the employer and is used for official purposes only, there is no tax liability. But detailed records of all the official journeys need to be maintained like date, destination, mileage, bills and other costs. The employer has to provide a certificate to that effect.
2. When the car is owned/leased by the employer and it is used for both official and personal purposes the expenditure shall be considered under Rule 3(2)(A) and Table II of Value of Perquisites.

In that case consider the following,

3. When the car is owned/leased by the employer-value of the car used only for personal expenses:If the car is provided by the employer and the expense is also borne by the employer but the car is solely used for personal purposes, then the entire amount is taxable. The payslip shall mention the amount and it will be taxed as per the applicable tax rates. If the employer recovers any amount from the employee, that shall be deducted from the taxable amount.
4. When the car is owned by the employee but the running and maintenance expenses are reimbursed by the employer: If the car is used for official purposes only then the treatment shall be the same as point number 1 described above. But when the car is used for both official and personal uses, then the expense shall be deducted by the following amount and the remaining amount shall be taxable,

2. A self-employed person/a businessman:

Where the vehicle is owned or leased by the individual, all the expenses incurred by him/her towards it shall be deductible from the taxable income provided the vehicle is solely used for business purposes. Similarly, if a rented/hired car is used for business purposes, the rent shall be adjusted just like any other expense to run the business against income. If the vehicle belongs to the business, all the additional costs incurred towards its accessories while buying it, initial charges and taxes paid for buying it shall be added to its cost. Insurance, petrol and repairs and maintenance costs are allowable expenses. When a self employed person uses a leased vehicle for business purposes, the expense incurred towards its lease rental shall be an allowable expense.

Thus, as compared to a salaried person, a self-employed or a business person enjoys more benefits as he can claim all the vehicle related expenses if the vehicle belongs to the business and is used for it. Not only that, depreciation too can be claimed in that case. No such benefit is available to a salaried person.

Subscribing to a car:

Have you heard about subscribing to a car? It is a new concept. It comes with flexibility and is quite easy if you would like to subscribe to it. Once you opt for a subscription, there is no pressure of completing it. Revv and Zoomcar are quite popular when it comes to a subscribed car.

You can get a used car subscription for a month upto a period of 36 months from Revv. This period can be extended beyond 36 months. While choosing a car through subscription there are no CIBIL checks. The company does all the routine service. The subscriber can return the car whenever he wants subject to a penalty.

The amount that you pay is inclusive of insurance coverage, regular maintenance, road tax, servicing and 24 hour roadside assistance. The car can be taken anywhere in India.

The steps that you need to take for subscription are:

1. Sign up with the website
2. Browse through the card models offered
3. Reserve the model you like online
4. You will get a call from the company. Provide your preferences and KYC formalities.
5. Within 10-15 days you will get a deeply cleaned and sanitized car at your doorstep.

Another company providing this facility is Zoomcar. From one month to 24 months the subscription offers a wide range of cars. Just like Revv the amount of subscription includes all costs like insurance, maintenance and service etc. and does not need any CIBIL score. you may also get a chance to buy the same car in a few cases. The car is delivered within 12 hours once your ID is verified. A penalty is charged if you cancel your subscription and return the car. It is available in more than 20 cities of India and grants an annual mileage of 48,000 kms. Zoomcar allows you to share your car to generate revenue. You can rent out your Zoomcar through one of their platforms.

The best thing about a subscribed car is, there is no down payment or road tax. Maintenance and servicing of the car is taken care of by the company. Yet there is no long term commitment to continue the subscription.

The drawbacks of a car subscription mainly are-

• The monthly fees vary with the model of the car. For a higher model, you have to pay a higher charge.
• Only when you have a regular income can you afford a car subscription which needs a monthly payment.
• They are not available at all locations.
• Over several months or years, subscription is an expensive alternative.

We can conclude that overall, buying a vehicle is more beneficial as compared to hiring/leasing it. Because the vehicle is at your disposal all the time. The residual value too shall be completely yours whenever you want to give it away. If you are a business owner, there are more perks of having a vehicle to help you with running your business. Leasing could be beneficial when you are in need of the vehicle but do not want to purchase it instantly. Using it for a longer time and then buying it is allowed under lease contracts. Hiring a vehicle is for short term users who do not want to keep the vehicle for a longer period. A hired car could be a self driven car too. Revv, Myles, Zoom, Avis etc are the known Indian self driven rental cars. Subscription is also an attractive option despite being a relatively new concept. However, it is available mostly in big cities only.

Before you make a choice, thoroughly consider all the pros and cons associated with your decision. You will never regret making an informed decision.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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