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FREQUENTLY ASKED QUESTIONS


Car leasing is a process for acquisition of an automobile preferred globally; it is a one stop solution related to all car needs right from unprejudiced choice of the correct vehicle, financing, procurement and related paperwork, insurance, maintenance, troubleshooting and ultimate disposal thus covering all required aspects during the entire period that the vehicle owner wants to own/use the car.
It is a competent option to vehicle loans via which an automobile owner can change the timing of cash outflows. Car leasing is a financial cum service instrument that helps reduce the effective cost of ownership through the following:

  • Lower NPV (Net Present Value) of cash outflows
  • Lower and better total maintenance
  • Lower and better insurance facilities
  • Greater Tax benefit
  • Total avoidance of risk in relation to the following
  • Risk of unbudgeted maintenance cost
  • Risk of fluctuation in resale value of car at time of disposal
  • Over the last decade vehicle leasing has become the universally-preferred-option for acquiring a vehicle by the corporate sector in first world countries like Europe and USA. According to a survey 60% of the vehicle acquisition takes place through the leasing method on an average.

    Quantitative reasons

  • Lower EMI as compared to bank loans
  • Greater tax benefits as compared to depreciation tax benefit
  • Off balance sheet funding prevents capital blockage in non-core assets
  • All inclusive lease rentals with cheaper maintenance and insurance rates
  • Better vehicle discounts
  • Better cash flow budgeting as all expenses are underwritten by the Leasing Company
  • Residual value risk is borne by leasing company

  • Qualitative reasons - Benefits of Fleet Management

  • Very effective HR tool
  • Expert advice on choice of vehicle as per your specific needs
  • Saving of management time and effort
  • Hassle free trouble free usage
  • Lower down time for accidents, services and repairs
  • Improved fuel efficiency
  • Reduction in overall maintenance cost including avoiding unnecessary administration costs

  • Let us take into consideration both these scenarios. EMI paid against bank loan: the consumer pays 100% of the loan amount over the agreed tenure of 3,4 or5 years and at the end of the tenure you usually sells the car at current market value; hence the consumer pays for 100% of the car i.e. greater cash outflow due to higher EMI and also bears the risk of fluctuation in residual value resulting from model discontinuation/accidents etc. Under leasing instead of waiting for 3 to 5 years to sell the car the estimated market value of the car is deducted from the loan amount upfront and you pay EMI only on the net cost - this results in much lower EMI and you also avoid the risk of fluctuation in residual value, being a risk that is underwritten by the leasing company.

    Dry Lease is when a consumer opts for a no maintenance service plan from the leasing company, which means that there is no kilometer restriction on this kind of lease plan however this means that the Resale Value risk appetite of the leasing company is lower. A WET LEASE is the lease plan which includes maintenance service by the leasing company.

    This is not the case it is a wrong observation. Under normal ownership (i.e via loan or personal funding) the consumer purchases the car, to use for a period of 3 to 5 years approx. and then sells the car; based on the choice of the individual the car may be retained for a longer period but is eventually sold.

    The same is also true under leasing the consumer you can hold the vehicle as long desired; however, on the 1st day itself, the consumer actually buys the vehicle and then sells it to the leasing company - so the lease brings forward the occurrence of sale i.e. pre-pones it. The cost of the car is itself reduced by the estimated resale value of the vehicle to reflect this. Hence lease rentals on a car will always be lower as compared to the traditional Auto-loan.

    To conclude, under both loan and lease, an individual buys the vehicle and then sells it however - only under leasing, the timing of sale is changed and brought forward to inception in order to lower the EMI per month. Add to this the Income Tax Benefit due to the Lease EMI coming from your Employer and from your pre-tax salary; and these entire schematics result in significant savings per month through increased available take home salary. Which can later if invested in a safe and secure way (savings account or Fixed deposit accounts) will result in greater financial benefit or lower cost or alternatively can be used to buy off the car at end of the lease period.

    The estimated residual value of the car is subtracted upfront to bring down the monthly EMI which helps the consumer steer clear of the risk associated with fluctuations in residual values resulting from model discontinuation, damage to the car, accidents etc.

    From a financial stance, the Present Value of resale proceeds of a car to be received at end of 3 to 5 years (under ownership model) is much less as compared to upfront value reduction in Leasing. In addition under leasing there is no risk - if the actual resale is lower as compared to estimated value deducted upfront the loss is borne by the leasing company; whereas profits are shared with the consumer.

    Residual value is a value that is pre-calculated at the end of the leasing tenure keeping mind the following factors; type of car, merits and demerits of the vehicle model, new models being introduced, city of usage, type of usage, individual's driving habit, purpose of usage, government regulations, taxes applicable in India from time to time etc.

    However under dry lease, the Residual Value considered is lower than the one estimated through our calculations as mentioned above.

    FMS is associated with the following services:

  • Maintenance: Scheduled, unscheduled and running repairs.
  • Door to door: pick up and drop facility for services and repairs.
  • Emergency services: 24/7 emergency roadside break down assistance.
  • Insurance: Full coverage in case of an accident.
  • Has tax incentives, does not result in assets or liabilities, which can improve the lessee's financial ratios.
  • Cash in hand goes up while CTC remains same
  • Vehicle purchases are recorded as debt and reduce available cash, leases are treated as operating expenses hence protect balance sheet
  • Keeps your cash flow in check as you avoid paying hefty up-front charges
  • As technology advances option to switch to a newer vehicle at the end or middle of tenure (if contracted for).
  • No visiting showrooms, banks or arranging for documents
  • No resale risk or maintenance pressures
  • Option to own the vehicle at end of vehicle lease contract
  • In direct purchase (non-lease) the consumer usually wants to sell the car after 3 to 5 years, realize the disposal proceeds and use the same for reducing acquisition cost of next purchase. Under leasing, such benefit is given upfront - Estimated Resale value is deducted from Cost of Car to calculate a substantially reduced EMI.

    At end of lease the user can retain the vehicle at the estimated market value (by participating in an open bid conducted by the leasing company) or he can simply ignore the used vehicle and go for a new vehicle (the used vehicle will be taken back by the leasing company).

    End of lease funding for retaining the vehicle - since estimated market value has already been reduced upfront hence the lower EMI per month generates enough savings to the employee to fund the purchase the vehicle at end of lease through his own resources rather than going for a fresh loan.

    No it does not. Leasing is subject to VAT (currently at 12.5% in general - varies with state to state) - however, the VAT included in purchase price of the vehicle is deducted as a result of which the impact is nullified i.e. the VAT included in the ex-showroom price of the vehicle is deducted from EMI and then VAT is charged to the customer on the reduced EMI - impact is that customer pays only interest component and there is no double charge of VAT. In short, the calculation method ensures that Lease rentals are indirect tax neutral.

    Note - certain States | Union Territories in India disallow the input credit of VAT to the leasing industry. As a result, the benefit mentioned above is not available to customers in these states of India. Some of these states are Gujarat | Uttar Pradesh | Uttaranchal etc. For a corporate customer which incurs VAT liability on its sales, the VAT on lease rentals can be availed as a set off thus making it even more attractive as compared to any other method of purchase.

    Service tax and education cess (presently 15%) is applicable only on the services included in the lease rental chosen by the consumer i.e. on insurance, maintenance and other value added services. For a corporate customer who gains Service Tax liability on its sales, the Service Tax on lease rentals can be availed as a set off thus making it even more attractive as compared to any other method of purchase.

    Comprehensive Zero Depreciation Policy insurance is the usual method of Insurance procurement.

    Varies from client to client and depends on factors like market interest rates, order volume, credit enhancements from clients etc

    The typical lease period is between 3 to 5 years. However the most opted for is 4 years

    Book Value + penalty + outstanding rentals + taxes - market value

    Any city of your choice in India