Financing vs. Leasing

LCT Staff
Posted on February 1, 2002

While leasing a vehicle continues to offer those in the limousine industry certain tax advantages, current economic conditions have produced attractive interest rates that make vehicle financing enticing. However, before you proceed in either direction, there are several critical questions you need to ask of yourself and your business.

A Surge in Financing Greg Maddock, fleet manager for Lockhart Cadillac, based in Indianapolis, Ind., is finding that attractive finance rates are encouraging the majority of his customers to finance their new vehicles rather than lease them, in spite of the advantages of leasing. ?When you lease, you receive a tax benefit because you can take full advantage of the payment when tax time rolls around,? Maddock explains. ?When you purchase a vehicle, the payment is amortized over a period of years. So there is a definite advantage to leasing, but you also pay a price in that you may pay a higher interest rate. What I?m finding right now is with interest rates so low and the prime rate going down, operators who have great credit and are financing vehicles are paying 6.5 and 7.5 percent, whereas they are accustomed to paying 9 or 10 percent.?

Maddock adds that often a lease requires a 10 percent down payment. ?A lot of these operators are high milers anyway, so they will only finance for 36 months,? he explains. ?The warranty is three years or 150,000 miles, so they will finance for the amount of time the warranty is good and then come back in and order another vehicle. They?re not afraid of the $1,000 a month payment, but many of these operators are running their cars 24 hours a day. For the small operator, 36 monthly payments are pretty hefty, especially if he?s running on a real thin profit margin anyway.?

First, Know Your Business Analyze what type of business you are conducting with your fleet, whether it?s one vehicle or 50, and determine what will provide the best cash-flow alternative so you can properly manage your fleet and have the revenue to make the payments that are needed to support it.

?Typically, when commercial vehicles are leased, the lessee is responsible for the residual obligation at the end of the lease,? says Tim Vella, product manager for Ford Motor Credit, based in Dearborn, Mich. ?When looking at a lease vs. buy scenario, the operator must decide if he or she is interested in a new vehicle every two to three years, or if they will keep the vehicle in service longer to justify the cost over 36 months.? Vella adds that if an operator keeps a vehicle in service over a longer period of time, there comes a point where the cost of maintenance outweighs the benefit of ownership. ?When a company leases vehicles, they can maintain their image and cut down on the cost of maintenance,? Vella says.

However, Ford Motor Credit and many other financial institutions are hesitant to lease to the livery industry because of liability issues, insurance costs and implications.

Cash-Flow Concerns Jim Smith, leasing manager for Brenner Leasing in Harrisburg, Pa., says the decision to finance a vehicle vs. lease is ultimately a cash-flow issue. ?If a lease is done correctly, it will be fully deductible and the payments will be equal to, or less than, the bank loan payments,? Smith says. ?So the operator receives the benefit of not paying for equity that doesn?t do them any good. The downside is that there may be a 10 percent residual on the back end of the lease. And it actually has to be 10 percent for it to be fully deductible.?

Smith does not advocate one method over the other to his clients, and he always takes into account each operator?s individual business picture before making a recommendation. ?We literally try to talk our customers out of 60- month financial contracts, because most operators are moving vehicles out between 36 and 48 months,? he says. ?So a lease could serve them much better. But if an operator has a large cash flow and wants to build equity in the vehicles because at the back end he?s going to trade the vehicle and have some equity on the trade, then that?s another story. There are people who live and die by finance, and my position is that if you have the cash flow and can support financing, that?s fine. However, most operators these days want the newest car for the lowest payment. That?s why leasing is so huge.?

Mileage Considerations There are penalties on a lease if you accumulate more miles on the vehicle than what was originally built into the particular lease. When you are deciding on a lease, investigate mileage restrictions, and if possible, tailor the lease to take into account the mileage you will be putting on the vehicle. This will help you avoid any uncomfortable mileage penalties at the end of the lease.

John Bradley, senior salesperson/fleet manager for R.C. Olsen Cadillac in Woburn, Mass., says that operators who put high mileage on their vehicles usually get destroyed in the lease. ?From a tax depreciation standpoint, it could be a better deal for them,? Bradley says. ?The problem is the expense. In this industry, most leases have a guaranteed buyback at the end. What?s the sense of doing a lease when you are required to buy it at the end??

In addition to knowing their mileage requirements, Bradley encourages operators to ... for more on this topic, see the February issue of LCT magazine.

LCT Staff LCT Staff
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