Renting an automobile is an alternative to buying that usually allows consumers to pay lower up-front costs and make affordable monthly payments. At the end of the rental period, however, the vehicle is not the property of the consumer. Instead, consumers opting for automobile leasing pay for the use and depreciation of the vehicle during the term of the lease. Buying a cash vehicle is usually the most cost-effective option, followed by financing a purchase and, finally, renting. The best option depends to a large extent on the situation of the individual consumer. In many cases, leasing allows people to drive a more expensive car or pay a lower monthly amount than they would under a purchase contract. Car leasing can also prove to be a viable choice for business owners due to the tax deductibility of lease payments on cars that are utilized for business ventures. In recent years, many special leases have been concluded with small business owners.
HOW CAR LEASING WORKS:
Like funded purchases, car leases require consumers to make monthly payments. Rather than covering the principal and interest of a loan, these payments cover the use and depreciation of the car over the lease period. The payment amount is calculated using the purchase price (capitalized cost) of the vehicle, its expected residual value (cost less expected depreciation) at the end of the lease, a fraction of the prevailing interest rate ( called leasing factor), and applicable taxes. In certain rental agreements, additional fees are included to cover all routine maintenance needs.
The first step in calculating the monthly payment is to determine the monthly rental rate. This rate is equally valued as the capitalized cost, also, in addition, is the residual worth, and multiplied by the leasing factor. The next step is to determine the vehicle’s monthly depreciation cost by subtracting the residual value from the capitalized cost and then dividing by the number of months of the lease.
A closed lease – the most common type – means that the dealer assumes the risk that the residual value of the car will be lower than expected at the end of the lease period. In this type of lease, the consumer can either buy the car for the residual value or leave. On the other hand, an indefinite lease means that the consumer assumes the risk that the residual value will be lower than expected and must compensate for the difference if that is the case. In exchange for a higher risk, the consumer generally makes lower payments for this type of lease. In general, two or three year leases are generally the most profitable for consumers. Shorter leases do not justify the added taxes, while longer leases mean that the vehicle requires too much repair.
TAX ADVANTAGES OF RENTAL:
Leasing, rather than buying a car, often provide tax benefits to small businesses. “Leasing can beat the purchase price in terms of tax benefits,” wrote Donald J. Korn in Black Enterprise. “Under current law, the interest you pay on a car loan is generally not deductible; however, when you rent, the financial charges are included in the monthly payment. If you need to deduct three-quarters of your rent payment, you are effectively deducting three-quarters of the interest.