To own or lease, what are my options?

Disruption is truly an indiscriminate movement where the torch bearers of such an initiative in any particular sector are truly convinced that radical changes in the process of conducting a transaction, inevitably results in benefits being passed on to the end consumer. How far is this true and how much of it is realistically achievable? Would you prefer to buy a car on Amazon if it were cheaper and came with a returns policy? Why Amazon and this ridiculous analogy? First of all, Amazon is not an online marketplace. It is s disruption platform. If Amazon is successful in selling cars online, dealerships would be seriously threatened.

In the automobile sector, disruption has come in from a seemingly unexpected source. It is called an operating lease, but not all attempts at disruption are destined to become a game-changer. While the certified pre-owned cars, a metaphorical euphemism for “Used” cars opened up a structured alternative, the onus of ownership remained intact. This article is an objective attempt to discuss the claims of car leasing firms, who basically engineer financial instruments that presents more of a mirage rather than lessen the burden of your wallet. Or leasing could actually work for you, in certain cases.

Would you pay more tax or more Interest?

Ideally, neither! However, it would make sense to pay a one-time tax that is revenue for the government rather than pay a higher amount as interest over the entire period of the lease. Let us look at applicable taxes for instance, with an example of a Honda City SV Diesel with a manual transmission. The City SV diesel costs 13.87 Lakhs on road in Bangalore. The total tax and cess proportion for this car could actually work out to almost 70%. To explain things differently, the actual price of the car without GST is only 7.85 lakhs. The 43% GST that applies to it brings the total base price of the car to 11.22 Lakhs. So, we actually pay a GST of 3.37 Lakhs. The road tax on this model in Bangalore is 2.11 Lakhs. There are a few other expenses that include registration, insurance and GST on the Insurance premium paid. So, these expenses actually come to about 6 Lakhs that is added to the untaxed price of 7.85 Lakhs.

Now, let us look at a loan from a bank at 9.25% and a 48 months EMI. This works out to a 15% down payment which is 2.13 lakhs and a monthly EMI of 29,500/- Over 4 years, ownership of this car would cost you 16.3 Lakhs plus service, replacement of wear and tear parts and other maintenance expenses. The total amount financed in this case is 11.74 Lakhs at an interest rate of 9.25%. An operating lease over the same period comes at a whopping interest rate of 13.75% and the total amount financed is 10.12 Lakhs. The monthly EMI comes to 24,341/- excluding VAT. The tax on this EMI works out to a staggering 37.75% after the recent abatement that has been offered. So, in effect, the EMI would be 33,530/- The total amount paid therefore over 48 months is 16.1 Lakhs. So, is there a benefit? Or is it simply the same thing, without the down payment?

The argument of a lower cost of ownership is where the savings on tax is offset by the huge amount paid as interest. And interest is obviously taxed. Would you choose to pay a higher proportion of tax or pay interest?

What is depreciation?

The classic definition of depreciation is a combination of how old your asset is, how much has been the mileage on it and more importantly, how well or how poorly has been the upkeep of the asset. Ownership is an endearing option that generally ensures better upkeep, regular service and a sense of pride. So, the claim of the residual value being predetermined by a leasing company is subjective in nature, but perfectly fine in terms of financial compliance when it comes to determining the true value of depreciation.

The fine print

What you get when you read the fine print is knowledge. What you get when you don’t read the fine print is called “experience”. An operating lease puts a restriction on the number of kilometers one can drive in a year and often comes with a geo-lock, that determines the boundary of your journeys. The “wear and tear” are also estimated on a case to case basis with the lessee having little or absolutely no access to prove her point otherwise. Let us now look at where a lease option actually might be a better option. If you are a business owner and have the option to write off lease expenses against income tax paid on net accruals of profit, this could be beneficial. If a large company wants to provide this benefit to all its employees, as part of its consideration for wages, this could be an excellent option that also ensures them to keep assets off their books. More importantly, if the travel routes are pretty much in a restricted territory and the kilometers are defined in a well defined range, leasing could actually work for you. The advisors at Whitefield Honda could probably enlighten you about what could be the right option for you.

Whitefield Honda – Putting you in the driver’s seat!