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Avoid Car Loan – Lease the Car

In one of my blog, I explained the difference between Productive Asset and Non Productive Asset & I suggested, not to invest in Non Productive Assets…There is one more class of Asset & it’s called Depreciating Assets. Your 4 wheeler i.e. Car falls in this category. The assets in this category neither appreciate nor give any regular returns or helps in savings. The investment in this asset class depreciates over a period of time. On top of it, if u buy any such asset by availing loan then it’s a huge Financial Loss/burden. Always avoid Car Loan and Car should be purchased from own fund sources.

In western countries there is a concept of Car Leasing; it was recently launched in India by Mercedes Benz & also offered by many small time operators in Metro cities…Under this scheme, you don’t buy a car from manufacturer or Lease agency but you lease car for fixed duration e.g. 7 years & pay fixed monthly rent to company for leasing the car…In a nutshell, you are not the owner of car but only hiring the same…Now you must be wondering, how it helps company, Answer is simple company claim/book depreciation @ 15% p.a. in its book so virtually in approx 7 years, company claim full upfront cost as depreciation, simultaneously it earned X Rs rent per month & after 7 years company will sell the car for Y amount therefore rent received per month and amount received after sale are returns/profit on investment. This concept is  currently in nascent stage in India but will definitely be a big hit in future.

Now how customer will benefit from leasing, to understand this lets take 2 scenarios

Scenario A: You bought mid-range car for 5 Lac Rs @ 13% p.a. interest for 4 years & you intend to sell the same after 4 years (90% of cars are being sold after 4 years of use). You need to pay approx EMI of Rs 13500 per month

Scenario B: You leased mid-range car of 5 Lac Rs @ 4k rent per month for 4 years

In Scenario A, for 4 years you will pay EMI and total outflow will be 6.42 Lacs (Principal: 5 Lac & Interest: 1.42 Lac). Now at the time of Sale, you can expect approx 2.5 Lac as Sale value after 4 years depending on city & car condition..Therefore for 4 years, you spent or rather say lost 3.92 Lacs i.e. whooping approx 1 lac per year. If you buy car from your own funds then u can reduce this loss by 1.42 Lac i.e. interest you paid on loan amount. Loss of 3.92 Lac amounts to Rs 8166 per month. In other terms it’s a financial loss per month

In Scenario B, your loss is restricted to only 48k p.a. instead of 1 Lac as in Scenario A

Therefore Car Lease is anytime better option compared to purchasing Car on Loan..If u buy Car from own funds then also Car Leasing is much more profitable scenario for you becoz instead of spending 5 lac upfront, u will pay on monthly basis & you can earn some returns on diminishing 5 Lacs (after adjusting monthly rent), which u would have paid upfront if u would have bought your own car.

The Loan should always be availed for building productive assets rather investing in Non Productive (Gold) or Depreciating Assets (Car)…Although, the mindset in India is to OWN but lets not be emotional while making such decisions rather we should be practical in our approach & save Xtra from where ever its possible.

Copyright © 2011-2012 Nitin Bhatia. All Rights Reserved.

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Rinku Chauhan
Rinku Chauhan
10 years ago

Dear Nitin, as per information available on public domain, average lease rental for a mid range car of 5 lac is around 10,000 and not 4k. Please do not misguide us.

Nitin Bhatia
Nitin Bhatia
10 years ago
Reply to  Rinku Chauhan

Hi Rinku,

Thanks for your input but just to add & clarify that i wrote this post 2 year back and at that time for 5 lac car, lease rental was approx 4k only. Secondly lease rental vary from city to city and keep changing so i have not shared any wrong info to misguide my readers. Hope you will agree.

Lastly, i shared scenarios for comparison purpose. May be in today’s scenario with lease rental of 10k for 5 Lac car it might not be beneficial for you to go for lease rental and buying a car may be right decision today.

The objective of post is to help readers taking right decision. Hope you will appreciate the same. Thanks again for sharing your inputs and keep reading.

Rinku Chauhan
Rinku Chauhan
10 years ago
Reply to  Nitin Bhatia

Thanks a lot Sir, I highly appreciate your work. Sorry for using the wrong words.

kumar
kumar
7 years ago
Reply to  Rinku Chauhan

Hi Nitin,

I have a query.
I am planning to take a car on lease for 2 to 3 years in my Company and it will be claimed under TAX exemption.If I leave the company within 6 months after taking car lease. Will it be any loss? Could you please suggest me? Whether is it ok to take car lease if I do not have plan to stay in the same company more than year from now.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  kumar

If you are planning to leave the company shortly then i will not suggest to opt for car lease. It is beneficial only if you complete the lease term.

Abi
Abi
9 years ago
Reply to  Nitin Bhatia

Dear Nithin Bhatia

Which lease company was leasing out a 5 lakhs car @ 4k per month 2 years back?? IF you could share the source it would prove your credibility! You have to agree u have hugely misguided readers!

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Abi

Please check in the market. The depreciation of car is booked for 3 years in book of accounts and after booking depreciation, the car is sold which is net profit for the company.

abc
abc
9 years ago

hi Nitin,

Can you please tell me which bank is suitable for car loan? SBI’s ROI is 10.95% with no prepayment and preclosure charges.

Also, there Bharatiya Mahila Bank which gives at 10.5 % ROI and when I contacted them, they say even they dont have prepayment and preclosure charges. But as this is new bank , I am skeptical. Also recently I saw news that it will be merged with some other entity. So is it advisable to go to BMB?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  abc

Bharatiya Mahila Bank is a PSU bank. Even if it is merged with some other bank, your car loan will not be impacted. I think you are getting good deal at 10.5% ROI for car loan. In my opinion you should go ahead.

Kanishk
Kanishk
9 years ago

Hi Nitin,

i applied for the Car loan but it got cancelled due to default i made with a loan and credit card in the past as i have settled the amount of loan and credit card with the bank but the bank is still not giving me loan due to bad credit score should i opt for leasing now? or do i wait for next few years to make a saving to buy a car in cash.. please advice

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Kanishk

Car is a depreciating asset so you may lease the same as i suggested in my post also.

abc
abc
9 years ago

Hi Nitin,
I have purchased a car with loan from SBI. Do we need form 34 during permanent vehicle registration? Please let me know.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  abc

Form 34 is required. Its basically an application for making an entry of an agreement of hire purchase / lease / hypothecation in the certificate of registeration.

umesh
umesh
9 years ago

Hi Nitin

we are in used car business can you suggest us few names who are in leasing so we contact them for their used car sale

Umesh

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  umesh

You may check local classified or call just dial / Ask Me service.

Rakshith
Rakshith
9 years ago

Need some information on car finance from different Source like bank, Finance company etc. Nowadays Finance company is offering lower interest than bank. I am not sure to go with finance company or bank. if you throw some light on topic this will be really helpful.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Rakshith

It is better to go to the bank. I will prefer SBI as they have lowest interest rate.

ms srinivas
ms srinivas
9 years ago

Hi i would like to buy Bmw3 seriez appx55lakhs& it will be in my company name. Apart from loan interest I understand the principal amount is also taxable at the EOY. The sum of income tax,loan intrest, maintainacne , insurance and car market relsale value loss will be mote than the cost we incur if we buy thru lease plsn? Regards Srinivas.M.S

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  ms srinivas

For high end car it is not beneficial but for low end car it is.

Deepak
Deepak
8 years ago

Hi Nitin,
My company has car lease scheme. How is company lease car vs outright purchase (no loan, fund from savings). Under company lease car, my take home will reduce (monthly lease rent 34k, take home reduces by 24k). Outright purchase from savings, 12 lakhs, means I forgo earnings (approx 11%). Is lease still better?
Regards,
Deepak

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Deepak

It require detailed calculation. Also you need to check terms & conditions of the lease. After a certain period car will be yours. Moreover you can claim tax deduction on fuel and maintenance, drivers salary etc. Lastly, whether you would like to stay with same company till the lease is over.

shishirmathur
shishirmathur
8 years ago
Reply to  Nitin Bhatia

Also bear in mind that there is a VAT with each month rental that you will have to bear.

arvind singh
arvind singh
8 years ago

Hi Nitin,

My company is not having car lease scheme.Still can I avail car lease from outside on an individual basis? If so can you please suggest me any such firm giving this option mainly in Hyderabad.

Also if I take car lease on my own from outside firm (Not given by my employee) then am I eligible for tax exemption for the rent I pay for the lease?And if yes how?

Thanks in advance.

Regards,
Arvind

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  arvind singh

You will not get any tax deduction on car lease if your company is not offering the same as a part of CTC package.

arvind singh
arvind singh
8 years ago
Reply to  Nitin Bhatia

Thanks for the quick reply Nitin.
If my Wife is self employed and I take car lease on her name …can she or myself take tax exemption that way??

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  arvind singh

No. It is provided by the employer.

premishpaul
premishpaul
8 years ago

Hi Nitin,

Can you give me some more in depth on this for an individual person. I understand that i wont have any tax benefits here.

Assuming, am leasing a BMW 3 Series costing around 39L and planning to have it for two years atleast. What would be the total cost incurred for me ?

At the end of 2 years, what will be the status. Will i be able to sell it or would it be sold by the dealer ? And will it really be a good deal for me to go with or am in burning my pocket with this ?

Premish

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  premishpaul

For personal use, the rate of depreciation is 15%. Therefore, for 2 years it should be around 30% or 10.82L. The answer of 2nd query will depend on the terms of lease agreement. You will have an option to return the car or buy back at pre determined rate. You will not be able to till you transfer it in your name. It is beneficial only if you are leasing it from your company as the rate of depreciation is 30%. Depreciation is claimed by the company and after 3 years, company will transfer it in your name almost for free.

Anil Kumar
Anil Kumar
8 years ago

Hi Nitin,

Can I have a lease agreement on car which is owned by her. She is also an employee with a less CTC. Can I claim incometax on lease amount with my employer if he pays the lease rental to my wife directly by deducting from my salary.

Anil Kumar
Anil Kumar
8 years ago

Hi Nitin,

Can I have a lease agreement on car with my wife which is owned by her. She is also an employee with a less CTC. Can I claim incometax on lease amount with my employer if he pays the lease rental to my wife directly by deducting from my salary

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Anil Kumar

Yes but it depends on your employer.

Ankur Agrawal
Ankur Agrawal
8 years ago

Hi Nitin,
What is the probability of success in starting a business of cars on rent?????

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Ankur Agrawal

In consumer segment very less but in enterprise segment, the success rate is high.

RAHUL KUMAR
RAHUL KUMAR
8 years ago

Hi Nitin,

I have a proprietary company in my name.
I leasing beneficial vis a vis buying from own savings?
Range around 8 L?

rgds
rahul kumar, Veteran
Lt Col

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  RAHUL KUMAR

You can buy in company’s name and claim depreciation.

ratnam
ratnam
8 years ago

Hi Nitin, I hope you are still replying to this awsome post. I am planning to buy a maruthi sedan I am guessing it should cost me minimum 10 lakhs here in hyderabad. Can you suggest is car lease a good option or buying it? My company is providing tax exception for car lease program. If I opt for a 3 year lease and then buy the car from lease provider. Do you think it makes sense? or just buy it?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  ratnam

If you are planning to stay with your current company for 3 years then you may go ahead with car lease option without a second thought.

Nivedita Bhandari
Nivedita Bhandari
8 years ago
Reply to  Nitin Bhatia

And what if company asks you to go within four months of company lease.

Nitin Bhatia
Nitin Bhatia
8 years ago

Then it depends on your company i.e. how they are winding up and accounting practice adopted for winding up

Nivedita Bhandari
Nivedita Bhandari
7 years ago
Reply to  Nitin Bhatia

Company has been acquired and they are asking employees to leave. So do i need to pay for the foreclosure or penalty for the lease or is it borne by the company? TIA

Nitin Bhatia
Nitin Bhatia
7 years ago

Normally in such cases, if the 3 years is not completed then company give an offer to employees to purchase the car from company at X price. The depreciation is normally 33%. You can say that this amount is sort of penalty or foreclosure charges. This amount is paid by the employee.

Prithvi raj
Prithvi raj
8 years ago

Hi Nitin,

I am planning to buy a car and attach it to ola or uber..Is it worth investing in that business??

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Prithvi raj

It depends. It is advisable to understand the business model first before any investment. Secondly, it is difficult to get drivers in many cities. You should understand all operational aspects.

kakaso
kakaso
7 years ago

Hi Nitin,
You have posted a brilliant article. liked the way u explained

I have some query.
suppose, I bought car by using company lease policy.
1. Now company has been got shutdown then ?
2. Company terminate employee. then ?

So do employee need to pay for the remaining lease or how it works.

As employee don’t have money and he lost everything till he get something NEW.

One more query.
What the prerequisite amount.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  kakaso

1. Usually company offer the employee to pay X amount and buy it from the company
2. The reason of termination is important. Company may ask the employee to surrender the car or offer to retain. The employee has to pay.

For perquisite, please check my following post
https://www.nitinbhatia.in/personal-finance/10-perquisites-that-can-help-in-tax-savings/

Vicky kulkarni
Vicky kulkarni
7 years ago

Hi Nitin, I hv joined a new company recently they have a car lease option which gives me tax advantage. If the price of car is 20 lakhs, How much would it cost me on monthly basis to go on lease for 3-5 yrs. I have no plans to change the company. Is it beneficial as well? I’m on the verge of buying a car, so ur advice will help.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Vicky kulkarni

It depends how the company is claiming depreciation and perquisite value of the same. You may clarify from HR or Finance department.

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