Car Leasing vs Purchasing

Hi, We have a fleet of 7 company cars which upto now we have upgraded every 4-5 years. We are now looking at the leasing option and I would appreciate anyones experience or thoughts on going down this route. Each car would average 30,000km per year and the cars are purchased with cash in hand, ie. no bank loans.

If you have cash in hand, why would you borrow/lease?

Outright ownership is far more flexible. You can get rid of the car after 3 years. Or you can keep it for 8 years. If you have a 5 year lease, you have to do a deal at the end of the lease if you wish to keep the car. If you have a 5 year lease and want to change the car earlier, then you will have to do a deal with the leasing company which usually involves taking out another 5 year lease on another new car.

If you buy the car, you can sell it to an employee without needing the involvement of the leasing company.

I suspect that you get a much better price being a cash buyer.

I don't think that there are any tax advantages to leasing, but I am not sure.

If you have borrowings in the company, then it would be a different matter. Would the effective lending rate on leasing be lower than on other borrowings? But, even then, I suspect that the flexibility outweighs any lower interest rate.

Isn't there an accounting benefit to leasing rather than buying? It's an expense rather than an asset and this will reduce your Operating Income and hence tax liability? (I'm not an accountant!) And there's a cash-flow benefit to leasing.

Hi Squonk

That makes little sense to me, and I am an accountant.

In the financial accounts, the company will charge depreciation to the P&L if they buy the cars. They will charge leasing charges if they lease them. I suspect that the depreciation will be less than the leasing charges.

As the company appears to have the cash, the cash-flow benefit is moot.

Brendan, the reason we are looking at this is primarily due to repair costs associated with cars with a high mileage. we have noticed that despite being serviced regularly by the main dealer, engine issues have become more common resulting in repair costs , car hire, etc. We are wondering whether car leasing would work out as a cheaper alternative when everything is taken into account, including as Squonk as said, how this is dealt with from the accounting side

I would say that it is very unlikely that leasing would be cheaper. I imagine that the leasing companies build in the costs of servicing and then some into the leasing charges.

You can probably get a maintenance contract with the garage to cover servicing, and a free car during servicing.

If you have a fleet of 7, would you not keep one of the older cars on hand, so that you would not have to hire a car during servicing?

But there must be a science to fleet management, where all these issues are addressed.

There is no 'correct' answer. Generally leasing makes more sense unless you plan to hold on to the vehicles for long time e.g. 5 years or more.

From a cash flow perspective, leasing also might make better sense as there is an opportunity cost to you paying the entire outlay up-front from your cash account. Is there a better use for that money? Might not be but you need to look at it.

From an accounting point of view, one possible advantage of leases is that it can get the assets off the balance sheet. This improves some performance ratios such as gearing etc but this is only really likely to be an issue for bigger companies.

From a tax angle, there probably isn't really any real difference between the two.

Thanks all for your help. Much appreciated.

Two weeks behind on this topic but I'll put a couple points to you as I have experience on both sides of the leasing fence.

Sunny is correct in stating that there is little tax advantage of one over the other. As cash flow doesn't appear to be an issue, I'll park that also. Brendan is spot on in saying that it's unlikely that leasing is cheaper. It's not. Any good or service that is employed using leasing is more expensive and motor leasing is no exception. Leasing companies take margin on almost every aspect of a vehicle's life from initial purchase (fleet bulk discounts/rebates) to service, repair, maintenance and remarketing. Built in also is the large margins currently being taken by the finance underwriters.

While some of the larger leasing/fleet companies have their own funding arms, the rates are pretty steep. Brendan also mentions getting a service contract from a dealer and this is widely available (shop around). Also, some dealers will agree a buyback price so you could negotiate this. You will get better terms if you replace your fleet with the same dealer.

Last note is that with only 30K per vehicle per year, don't change under 4 years and look for vehicles carrying free servicing for yr1/yr2+ and also with good warranties (5yrs+). With proper sourcing and management, your vehicle costs (excl. fuel) should come down.