By Manas Arora, Co-founder & CFO, Alt Mobility.
National June 6,2023:Owning a vehicle can be an exciting experience but before heading to a dealership store, you should know the major choices of finance - Leasing and Financing. Both are popular ways to acquire a new vehicle or equipment, however, leasing emerges as a growth accelerator in the present automotive industry, especially in EV adoption.
As EVs are becoming synonymous with the future of mobility, industry stakeholders are spending heavily on new business and financing models. To help the industry gain traction, stakeholders put greater emphasis on leasing options that involve lower monthly payments and let you drive so you get into the cycle which makes monthly payments easier and affordable. Apart from this, a multitude of reasons justify why leasing may be better than financing for certain situations:
Lower Monthly Payments:
On the surface, lease rentals can be more appealing as they are generally lower than EMIs. Simply put, you only pay for the portion of the vehicle's value that you use during the lease term, rather than the entire value of the vehicle. Additionally, you are not paying back any principal amount which makes leasing a more affordable option for those who need to keep their monthly operating expenses low.
Leasing can take the financial burden of monthly EMIs that contributes to employment generation opportunities in the taxi business. This helps the lessee in rolling out his monthly cash flow while keeping their expenses significantly lower in the beginning.
Lower Upfront Costs
In most cases, the upfront costs for leasing a vehicle are lower than the down payment required for financing. Typically, you have to put down a lesser amount as a security deposit and the first month's payment that is significantly lower than in the case of financing. Further, in leasing the discounting of the Residual Value is attained on day 0 hence the overall monthly obligations in the form of lease rental also become very lower.
Many financial advisors also suggest making an upfront payment of the highest possible amount is necessary when buying a new vehicle to have reduced monthly payments and principal amounts. While leasing a vehicle can be started with the lowest possible down payment and a fixed monthly payment.
Insurance, Maintenance, and Repair Coverage:
Many leases come with Insurance, maintenance, and repair coverage (including battery replacement which is almost 50% of the vehicle cost). It can potentially save the lessee from unforeseen expenses. Lease arrangements can also save money on routine maintenance and repairs as most of the repairs are covered in lease arrangements.
Unlike financing, the lessee does not responsibly have to bear all expenses including insurance, routine maintenance, and repair costs, which can add up over time. Similarly, it also reduces the stress of depreciating car value and the hassle of selling it at the right price.
Flexibility
Leasing allows you to drive a new vehicle every few years. You will always be driving the latest model at a lower monthly cost which can be appealing to those who like to keep up with the latest technology and features. Unlike leasing, you don’t typically have to be committed to the vehicle for the entire loan term and enter into new leasing terms for a vehicle from a different owner.
On the contrary, a lessee can purchase the same vehicle if they love driving it at a relatively lesser price than the market value of a brand-new model. Leasing always includes an option to purchase the vehicle at the end of the lease and gives the lessee the flexibility to own the same vehicle.
Additionally, the government of India has shown significant interest in making the leasing of EV vehicles financially viable in the market. For instance, a lower GST of 5% and a high depreciation rate of 40% has made the leasing market more lucrative. As a result, a vast majority of vehicles on the road today are EVs and are used for commercial purposes including, last-mile delivery services, cab rides, etc.
Bottomline
Ultimately, the decision between leasing and financing depends on your individual needs and financial situation. If one wants to start making a cash flow with a lower down payment, they can go for leasing while those who want to enjoy customizations, mileage, and full control of the vehicle can opt for financing. In fact, many people who cannot afford an expensive luxury vehicle also go for a leasing option to fulfill their high-end experience. Therefore, it is important to consider factors like your budget, driving habits, and long-term goals when making a decision.
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