Leasing v Renting

27/03/2017

Size matters vans

When you lease or rent a vehicle, you pay for the right to use a car owned by someone else. However, that's largely where the similarities end. Leased and rented vehicles are very distinct financial arrangements with different types of commitments and usage expectations on the part of the driver.

Leasing

When you lease, you pay for only a portion of a vehicle's cost. This is the part that you ‘use up’ during the time you're leasing it. Therefore, leasing is usually the cheaper option in the short-term, particularly for those wishing to drive a new car and change it every two or three years.

However, with most leasing agreements you don’t own the car. So, if your drivers are prone to run it into the ground, you’re probably more suited to buying.

Leasing is a great option if your drivers:

  • Enjoy driving the latest new vehicle and like the idea of replacing it every two or three years
  • Looking for lower monthly payments (or the opportunity to drive a more prestigious car)
  • Want a vehicle that is always under warranty
  • Want a vehicle that has the latest safety features
  • Don't like trading and selling used vehicles
  • Don't want to lose money on high depreciation costs

As a small business, it will free up cash flow as well as credit lines. However, you may be better off buying if you don't mind higher monthly payments (loan or other finance), prefer to build up trade-in or resale value, like the idea of ownership and

do not mind the cost of repairs after the warranty has expired.

Renting

Rental vehicles are owned by the rental company and are maintained, serviced and insured by them. They make money from renting the same vehicle over and over again.

Rental rates are determined by the rental company and based on a daily or weekly fee. They may include unlimited mileage or a set mileage rate and the method by which rates are determined is company confidential. They can vary widely (even within the same rental company) as they are based on a variety of discount schemes.

Different financing

Rental is not a form of vehicle financing (or operating lease) whereas leasing is. Lease financial payments are easy to calculate using a well-defined formula. At lease end, vehicles are returned to the leasing company as the final payment of the lease or ‘loan’. This residual value has been carefully calculated at the outset of the lease to take account of loan interest, depreciation and remarketing value.

Rental companies have a vehicle exit plan too but they are not tied to a contract as to when this happens, instead they can choose the optimum time to remarket the vehicle depending upon its age, condition, mileage, market conditions and asset value.

Another major difference is the time frame of use. Leasing a vehicle is a longer-term commitment - the lease is paid until you want to buy the vehicle or lease another car. Rented vehicles generally have a much more narrow commitment. Some people rent for a week or two, but shorter-term rentals of one to two days are also common.

Leasing a car typically involves a possibility of ownership at the end of the lease. You either elect to stop paying the lease or pay enough to own the car outright. Rental vehicles have no potential for ownership - you simply pay a fee to use the car for a specific period of time.

Insurance on a leased vehicle is typically required, whereas insurance on a rental vehicle is normally optional. For both, you must carry a minimum of liability insurance on any vehicle driven. However, dealers that lease cars usually require you to carry full coverage, which includes collision and comprehensive benefits, to protect the value of the car.

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