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Principle of Car Leasing

What is Car Lease (Auto lease) ?

A Car Lease is a commercial finance product which enables the customer to have the use of a car or commercial vehicle and the benefits of ownership, while the lessor retains actual ownership of the vehicle. A Car Lease can also be known as Vehicle Lease or Auto Lease.


How does a Car Lease work ?

The Lessor (financer) purchases the vehicle on behalf of Lessee (customer), who (lessee) then leases the vehicle back from the financer and pay a fixed monthly lease rental for the term of the lease.

At the end of the lease the customer can either pay a fair market value or residual value on the lease and take ownership of the car, trade it in or refinance the residual value and continue the lease.


Benefits of a car lease ?

  • Flexible contract terms
  • Fixed monthly lease rental
  • Costs are known in Advance
  • A residual can be applied to a lease, lowering monthly payments
  • Tax Benefits are available when the vehicle is used for the business purpose
  • As the VAT contained in the car’s purchase price is claimed back by the financer, only the vehicle’s price is exclusive of VAT is financed, lowering monthly payments
  • Ability to make advance lease payments for tax deduction or cash flow purposes
  • The lease is secured against the vehicle, allowing lower interest rates.

Car lease is beneficial for which segment ?

Car Leasing is suitable for Companies, Partnerships, Sole Traders and individuals where the leased vehicle is for income producing purposes or Employee benefit program. It is ideal for employees who want to salary package through as a part of their remuneration.


Tax Implications of a car Lease ?

VAT is charged on the monthly lease rental and on the residual value at the end of the lease. Where the customer is registered for VAT, they can claim some or all of the VAT contained in the lease rental and the residual value as an input credit on their Business Activity Statement.


FAQ’s

1. What cost is covered under Lease?

A. Leasing includes complete vehicle cost incl Ex-Showroom Cost, Registration & Road Tax, Insurance and Octroi Cost.



2. Who bears the insurance and maintenance costs?

A. The Lessee. Insurance costs can be included in the Lessee’s monthly payment.



3. Under lease one pays EMI for 3/5 yrs but doesn't own the car - why should one take it?

A. This is a wrong perception. Leasing usually works out cheaper for Vehicle owner than buying a vehicle outright or through Loans.This is because when you compare, Vehicle ownership under loan or outright, Vehicle is purchased & used for a period of 3 to 5 years and then ultimately it is sold; in certain cases, based on the choice of the individual the vehicle can be retained for a longer period but ultimately it is sold.

Whereas under leasing, the same is also true - i.e. you can hold the vehicle as long as you desire; the Acquisition cost of the vehicle is itself reduced by the estimated resale value of the vehicle and thus lease rentals on a vehicle will always be lower as compared to loan.

To conclude, under both loan and lease, an individual buys the vehicle and then sales it subsequently - under leasing, the timing of sale is changed to lower the EMI per month. These results in substantial savings per month through increased available take home salary which invested in a safe and secure way will result in greater financial benefit or lower cost or alternatively, can be used to buy the vehicle at end of the lease period.



4. What are VAT implications in Leasing, Does it not make leasing more expensive?

A. NO. Leasing is subject to VAT (currently at 12.5% in general - varies with state to state) however, the VAT included in purchase price of the vehicle is deducted as a result of which the impact is nullified i.e. the VAT included in the ex-showroom price of the vehicle is deducted from EMI and then VAT is charged to the customer on the reduced EMI - impact is that customer pays only interest component and there is no double charge of VAT.



5. What is the payment method?

A. The usual payment method is through an irrevocable standing order instruction on the Lessee's bank account or Post Dated Cheques to transfer lease rents to Magma Fincorp Ltd.



6. What are the Lessee’s options at the end of the lease term?

A. In a finance lease the Lessee can exercise one of the following options:
1. Acquire the asset by paying a nominal value of ‘Minimum Value’.
2. Return the asset to the Lessor.
3. Extend the lease period for ‘secondary lease period



7. Can the lease contract be terminated?

A. Yes. The Lessee must pay the Book Value as per the agreed Terms & Condition.


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