Car leasing: a worthwhile alternative to a car loan?

Renting a car instead of buying it is possible with car leasing. The monthly rates seem temptingly low, but you should look carefully if you want to lease a car. To find out what’s involved and whether car leasing is really worthwhile for private customers, contact dr. Small.

What is car leasing?

Car leasing is an alternative to car financing as well as car buying. The word leasing comes from the english and means "to rent": with car leasing you rent a vehicle for a certain period of time. This is particularly popular with the self-employed and freelancers, but is also becoming increasingly popular with private individuals. Accordingly, the number of lessees has been rising for years: according to the Federal Association of German Leasing Companies, around 41 percent of newly registered vehicles in Germany were purchased by means of car leasing in 2017. Thanks to the low monthly rates, it also seems cheaper at first glance to lease a car instead of financing it. But obligations, restrictions and possible additional costs at the end of the term could put a spoke in your wheel.

How car leasing works

Most customers choose to lease a new car, but it is also possible to lease a used car. The corresponding leasing contract is concluded either with the manufacturer’s car bank or with an independent leasing provider. As with an installment loan, the lessor will of course first run a credit check – you must be able to service the monthly installments. car leasing takes place over a longer period of time: the minimum term is typically one year, but common terms are also 24 to 36 months. During this period, the contract cannot be terminated.

Faqs – frequently asked questions

If you lease a car, you have to pay a fixed instalment every month. The amount of this rate depends on the car model, the agreed form of contract and any additional services that you can book on top of it. As the owner of the vehicle, you are entered in the vehicle registration document, which you must always carry with you in the car. However, the owner remains the lessor, who also keeps the vehicle title in his possession. You are therefore only the user of the car. Nevertheless, you are obliged to maintain and service the vehicle during this period and to have it repaired if it is damaged. You can also conclude a service contract with the leasing company, in which case inspections, for example, are included in the – now higher – leasing rate.

At the end of the contract, you can continue to lease the car or return it to the leasing company. If you would like to keep the vehicle, you should have already included a purchase option in the contract. Otherwise you will have to renegotiate with the lessor. The installments already paid will then be credited against the redemption sum in the event of a purchase.

The different types of car leasing contracts

An important point when leasing a car is choosing the right type of contract. Three different types are possible: mileage leasing, residual value leasing and zero leasing.

Mileage leasing

Mileage leasing is the most common option. In this case, the contract specifies the maximum number of kilometers you are allowed to drive with the vehicle. If you stay under the specified number of kilometers, these will be reimbursed to you by the lessor – minus an agreed exemption limit. However, it can be expensive if you drive more kilometers than agreed: you will then have to pay extra for these. Although many leasing companies offer a certain amount of grace of around 2.500 additional kilometers, everything above that, however, you have to compensate financially.

How high these extra costs are depends on the car model – for example, you will have to pay more for a sleek sports car than for a small car. On the other hand, the number of additional kilometers is decisive. The leasing companies often set additional limits for this: for example, for the first 10 kilometers of the vehicle, the lessor waives the interest.If you are not at fault, you can have the value reduction compensated for by the other party’s insurance company. Therefore, when signing the leasing contract, make sure to specify a realistic number of kilometers.

Residual value leasing

A second option in car leasing is residual value leasing. At the beginning of the leasing period, it is determined how much the car is still worth at the end of the contract period – you therefore pay for the consumption of the car. The difference between the residual value and the price of the vehicle forms the basis for calculating your monthly rate. In addition, there is an interest rate. The higher the residual value, the lower the leasing rate. However, if the residual value after the end of the contract is lower than agreed, you must pay the difference in arrears. This may be the case, for example, in the event of an accident during the leasing period. If you were not at fault for the accident, you can have the value reduction compensated by the opposing insurance company. The situation is different in the event of a self-inflicted accident: in this case, the lessor is entitled to demand compensation from you for the reduction in value when you return the vehicle.

If the accident results in a total loss, the leasing contract is usually terminated. Important: when taking out comprehensive insurance, make sure that you take out insurance with GAP cover. This means that in the event of a total loss, the insurance company pays not only the current value of the car, but also the actual book value deposited with the lessor. This is how you can avoid being stuck with potentially higher costs.

The contract for a residual value lease can include a so-called right of tender: the lessee undertakes to buy the car at the agreed residual value after expiry of the contract. If the lessee does not buy the car, the lessor may resell it and charge the lessee for the difference between the residual value and the proceeds.

Zero leasing

Another possible option for car leasing is zero leasing, which is often advertised during promotions. The vehicle will be financed at the list price. Often, leasing without a down payment is also offered in this context. In this case, the lessor not only waives the interest, but also the usual down payment. However, there is a decisive disadvantage with zero leasing: you have to forego possible discounts that you would have received, for example, with a cash purchase or car financing. This means that zero leasing is often more expensive than other leasing options.

The decision: which form of contract is better for the customer

And which variant makes sense if you want to lease a car?? We recommend mileage leasing, as the risk of subsequent payment is calculable. This way, you can already set the course in the contract, if you know approximately how intensively you will use the vehicle. With residual value leasing, on the other hand, the disadvantages outweigh the disadvantages. On the one hand, some dealers deliberately set the residual value unrealistically high, in order to be able to advertise low monthly installments. On the other hand, the market situation can change considerably during the leasing period, so that the residual value drops drastically. An accident during the leasing period also has an influence on the residual value. If you decide to buy the car at the end of the contract, the residual value may not be the same as the purchase price, so you will have to pay more for the vehicle.

The advantages of car leasing

Many drivers today choose to lease a car rather than buy it. There are many reasons for this, because car leasing can certainly score with advantages:

• you are not tied to a specific car for years, but you can exchange it again at the end of the term.
• You have lower purchase costs, because you only pay for the use of the vehicle.
• You pay less than with conventional financing because the monthly installments are lower.
• The lower monthly payments mean that you can theoretically afford a higher-value car.
• you have no expenses when reselling the car.
• You can include additional benefits in the contract. For example, you no longer have to worry about maintenance, car insurance or possible repairs. However, you will have to pay for this service with a higher leasing rate.
• If you use the leased vehicle for business purposes, you can claim the leasing rate as an expense for tax purposes.

The disadvantages of leasing a car

Even if it doesn’t seem like it at first glance, leasing can be more expensive than financing your car with an installment loan. The reasons:

• Leasing limits your flexibility: if you want more, you have to pay more. For example, additional services for maintenance or repairs make leasing more expensive.
• With private leasing, you often have to make a down payment in addition to the monthly installments.
• You cannot freely dispose of the car, as you are not the owner, but must abide by the terms of the lease agreement.
• You are bound to the leasing contract and cannot cancel it beforehand.
• You are obliged to take out fully comprehensive insurance and to have maintenance and repairs carried out at an authorized workshop. This can be more expensive than using an independent garage.
• Depending on the contract, additional costs may be incurred for excess mileage or if you do not return the car in perfect condition.
• Unlike commercial customers, you cannot deduct the car leasing from your taxes.
• If you have an accident, you must inform the lessor. If the accident was self-inflicted, the damage will be settled by your comprehensive insurance company. However, the lessor is then entitled to charge you for the vehicle when you return it. calculate 10 percent of the repair costs as compensation for the reduction in value.

Car leasing: what are the costs??

The monthly rate for car leasing is influenced by various factors: the type of vehicle, the annual mileage, the initial payment and the contract term determine the amount of the leasing rate. In our example, you can see how high the monthly installment would be if you leased a ford mondeo trend for two years with a limited mileage – and what financing via an installment loan would cost:

Mileage lease installment creditnew value of the car

term

annual mileage

down payment

cash discount

financing amount

interest rate

rate amount

total expenditure

result after 36 months

22.950 €	22.950 €
36 months	36 months
20.000 km	20.000 km
3.000 €	0 €
0 €	1.950 €
22.950 €	21.000 €
1,53 %	2,76 %
260,01 €	608,17 €
12.360,36 €	21.894,12 € (of which 894,12 € interest)
car is returned	own debt-free car

Some leasing companies also offer contracts without down payment. However, this increases your monthly leasing rate considerably. For our example vehicle, you would pay a rate of 345.27 euros with a 0 percent down payment – that would be around 85 euros more each month. If, on the other hand, you make a down payment of 5.000 euros, your leasing rate drops to 203.17 euros per month. With an installment loan, you do not have to make a down payment, but with a little negotiating skill, you can even benefit from a cash discount.

Faqs – frequently asked questions

Is it really so cheap to lease a car??

Based purely on the figures in our sample calculation, leasing seems to be more profitable than a car loan. But whether this is really the case, unfortunately, you can only see at the end of the contract period. Because only if they have fulfilled the conditions of the lessor and have returned the car in the contractually agreed condition, no additional costs are incurred. In addition, your monthly rate would increase if you add services such as maintenance or car insurance. Don’t forget the psychological effect: you are driving a car that is not your property; moreover, the money you pay for it is gone. In the case of financing, on the other hand, the car belongs to you and in most cases you will still be able to obtain proceeds when you sell it.

The options for leasing a car at the end of the contract period

When the lease expires, you have three options:

1. You decide to buy the car: for this you have to contact your lessor after the end of the contract, so that the car can be sold to you. In most cases, a balloon financing is now concluded: the amount that was not compensated by the monthly installments must now be compensated with a high final installment.
2. You want to continue to drive the car and extend the contract: in this case you conclude a follow-up lease with the lessor. As the residual value of the vehicle continues to fall, you will benefit from a lower monthly rate.
3. You return the car: depending on the type of contract, the mileage or the condition of the car determines whether you have to pay additional money or whether you get some back. Normal signs of use, such as minor dents and scratches, do not need to be replaced. In case of major damage, the depreciation due to excessive wear and tear must be paid for. The burden of proof lies with the lessor.

If you have decided to return the car, read the return protocol carefully before handing the car over to the lessor. If all the details are correct? Also, document the condition of the car; it may be helpful to consult an expert. If there are major damages, you can have them repaired before you return the car, in order to avoid a financial deduction.

Lease or buy a car: when is it worth leasing??

Because of the lower monthly installments, it seems cheaper at first glance to lease a car instead of financing it. But, as already stated, the real cost depends on several factors. A high down payment, additional services, maintenance at the contract workshop or defects when the car is returned make leasing expensive. And: as a private customer, you cannot benefit from tax advantages. In contrast to self-employed and freelancers – they can deduct the leasing rates from their profit and thus benefit from car leasing.

This is why it is often more expensive for private customers to lease a car than to buy it. If you are not sure, ask yourself the following questions:

• Is it important for you to drive a new vehicle often??
• Do you want to drive a particular car that you could not otherwise afford??
• Can you live with the restrictions and obligations of a leasing contract?
• Are you sure that you will be able to pay the lease payments each month?? Reminder: the lease cannot be easily terminated or modified.
• Are you prepared to pay any additional payments due at the end of the lease term??
• Do you not care that the car does not belong to you??

If, on the other hand, you would like to own the car and be able to dispose of it freely, financing via a car loan is a good option. The big advantage is that you can take advantage of the high cash discounts of up to 10 percent that many car dealers offer. Often, with a little negotiating skill, you can negotiate additional benefits, such as special equipment or winter tires. In addition, you retain your flexibility: you can design the car according to your wishes and do not have to adhere to mileage limits.

Our conclusion: if you don’t want to use the vehicle for business, financing is better than car leasing in most cases. Even if the monthly installments sound favorable, the vehicle is far from paid off at the end of the contract. Here you would still have to make a high final payment if you want to buy the car. In contrast to a car loan: here you will probably pay a higher monthly rate, but after the contract period the car is paid for and belongs to you.