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Sunday, December 01, 2013

BMW financial & operational lease- how does it work?

Cars can be bought on lease. This concept, again like self drive, is not common here in India as it is abroad. In India only high end car companies like BMW, Merc and the likes offer cars on lease. In this post, I am explaining the basics of buying a car on lease.

Because one of my senior colleague showed interest in the scheme, I called up BMW and Merc and asked for details of their leasing scheme. While BMW folks replied within few hours with invoice, Merc representatives are yet to revert on this. It is also apparent that call centre employees of these firms aren't trained to answer lease related questions and they often refer it to concerned department.

Back to the topic, I am illustrating below, taking an example from BMW. Mainly because BMW quickly replied to my query with information and partly because I'd driven a BMW 320d earlier this year.

How leasing is different from buying a car on loan?
When a car is on lease, car company continues to own the car. Customer pays a monthly rent for using the car. At the end of lease term, customer has the option to either surrender the car or own the car by making some residual payment. On the onset, this may look like a stupid idea- why would someone pay a monthly rent when they can own the car for almost similar EMI?

Answer is simple- EMI doesn't qualify for tax benefit, while lease rental does. Let us take an illustration
Car: BMW 320d
Ex-show room Chennai: 31.5 lahs, on road price: 38 lakhs
Option 1: Take a loan for 3 years, for 31 lakhs @10.8% interest
  • One time down payment of 7 lakhs
  • Monthly EMI of 1.01 lakhs
  • Monthly expense on insurance: Rs 11k  (1.26 lakhs per year)
  • End of 3 years, you'd have spent 63 lakhs on your car (7 lakhs down payment + 31 lakhs loan amount + 5.5 lakhs interest + 2.5 lakhs on insurance + 1 lakh, approx on other maintenance + 14 lakhs in income tax (i.e. 30% income tax paid on your earning through salary, which was spent on EMI and other vehicle expenses) + 2 lakhs in lost interest on down payment
  • Resale value of your BMW 320d after 3 years will be around 17-20 lakhs, when in reality, you've spent 63 lakhs on this car (Total cost of ownership). But you get to own the car and use it as you please.
Option 2: Take the 320d on financial lease
  • One time down payment: 0
  • Monthly lease rental:  2.2 lakhs on first month, 1.1 lakh second month on wards till 35th month
  • End of 3 years, pay 3 lakhs to fully own the car or return the car to the company
  • Your employer will pay you less salary and pay the car company the lease amount. Say instead of taking a salary of 2 lakhs and then paying 30% of it as income tax, you take a salary of only 1 lakh, thereby saving 30% right away, while company shows remaining 1 lakh as expense and pays to car company as lease amount
  • End of 3 years, you'd have spent 52 lakhs on your car ( 450000 lakhs in rental i.e. 1.25 lakhs monthly lease rental for 36 months and VAT & service tax) + 3.5 lakhs in residual value + 2.5 lakhs on insurance + 1 lakh, approx on other maintenance.
  • Resale value of your BMW 320d after 3 years will be around 17-20 lakhs, when in reality, you've spent 52 lakhs on this car. As you've noticed, total cost of ownership in this model is less than option 1, main reason being savings of 30% income tax when company pays you less salary and uses the difference to pay the rental.

Option 3: Take the 320d on operating lease
In operating lease, BMW owns and operates the vehicle, takes care of maintenance and insurance. Operating lease comes with a km restriction. Below illustration is for a rental with 20000 kms annual usage. If usage is more rental will be slightly higher.
  • One time down payment: 0
  • Monthly lease rental:  1.15 lakhs per month for 36 months. This includes insurance & maintenance
  • End of 3 years, company takes the car back, you get nothing
  • Your employer will pay you less salary and pay the car company the lease amount. Say instead of taking a salary of 2 lakhs and then paying 30% of it as income tax, you take a salary of only 1 lakh, thereby saving 30% right away, while company shows remaining 1 lakh as expense and pays to car company as lease amount
  • End of 3 years, you'd have spent 41.5 lakhs on your car (1.15 lakhs in rental+tax on rental * 36 months). No insurance expense, no maintenance expense, no money lost as income tax or tax on down payment.
  • Resale value of your BMW 320d after 3 years will be around 17-20 lakhs. You've spent only 42 lakhs on this car but own nothing in the end. If you had paid 63 lakhs as in option 1, you would have paid 20 lakhs more to end up with a car that is worth close to 20 lakhs. So this option (option 3) still makes sense.
  • Please note that there's a km restriction and any damage to the vehicle will have to be paid separately.
When on lease, one can easily change vehicles mid way. Example, end of 2nd year, if your financial position has increased and now you can afford a 5 series instead of 3, with minimal paperwork you can terminate 3 series lease contract and enter a new contract for 5 series. In option 1, this is tough, as you need to find a buyer, sell off the car and buy a new car again.

Lease schemes can be customized in consultation with the dealer (like step up, step down etc)

Mercedes Benz is yet to give me details of their lease schemes.

Unfortunately, lease scheme is not usually available for budget cars in India yet, except when your employer and dealer have some understanding. Tata Motors had once thought of launching such a scheme, but operational issues had made them abandon their plan.

Note that your employer may have their own terms and conditions to facilitate lease. Check your company policy.

Disclaimer: Financial numbers indicated in this post are purely illustrative and not binding on BMW. Author is not responsible for any variance. Lease and loan amounts vary on multiple factors (vehicle variant, accessories, payment model, term, usage etc) Kindly check with your local dealers for numbers that suit your situation and requirements.

More similar posts: Buying vs renting * BMW 320d photoshoot * BMW 320d- what you don't get for 38 lakhs

7 comments :

prasanna s said...

I guess the sceme is there wih all cars ,atleast in my company you can go for car lease with any brand but the benifit will be less for a budgt car

Shrinidhi Hande said...

Prasanna:
Agree.. for those who pay very less income tax, the savings are not significant. Also in lease model there're bigger headaches involved like vehicle owner absconding, accidents etc- the price advantage is not very tempting for companies selling budget cars

Mera Driver said...

This is very informative blog and i got very informative knowledge from this blog. Please keep it up this type of posting

Shrinidhi Hande said...

Thanks MD

Rahul said...

Hi, thanks for this very informative blog. I have one question.
My company is providing me a car lease allowance of 4L per annum. So if I take a car on lease whose price is 6L, then in 18 months, I will be able to clear the price of the car. So once that happens, will my salary reduce as I won't be paying anymore as the lease EMI.

Rahul Sharma said...

Still if you finance a car, you end up spending 63 lakhs after 3 years but the ownership is yours and all the wear and tear expenses are not included in option 2 and 3.
Also, re-sale value is 20 lakhs(assume) so overall cost comes to 43 lakhs in option 1.
Option 2 is good, wherein you pay remaining 3 lakhs and own the vehicle after 36 months.

Shrinidhi Hande said...

Rahul: I think there's no fixed formula.. everyone has to decide for themselves based on the numbers and what they deem as convenient...