What is long-term car rental?
For those planning to purchase a car for their business, the increasingly popular long-term rental may prove to be advantageous – now available for individual customers as well. In the article below, I will explain what it involves and the benefits of entering into this type of leasing agreement.
Long-term rental as a lease with high residual value
It's important to note that car dealers offering rental through their banks, such as VW Bank or BMW FS, do not provide a true rental service, but rather an operational lease with a high buyout option. This solution differs from traditional leasing primarily due to its lower cost. The product is cheaper because the customer does not pay for the entire car, but rather the difference calculated by the bank between the purchase price and the residual value—the amount for which the car can realistically be sold after the user's term. This difference is the amount that the customer pays throughout the contract. Since we are only paying for 40% or 50% of the vehicle's value (depending on the chosen car and mileage), this results in the most significant advantage over traditional leasing, namely, a monthly installment that is lower by up to 40%-45%.
The impact of depreciation on the monthly payment amount.
The amount we will pay each month does not directly depend on the class of the chosen car. This is undoubtedly another advantage of long-term rental over leasing, where the value of the car directly affects the monthly payment amount.
As an example, I will take delivery vans – the Citroen Berlingo and the Dacia Dokker:
*Data based on offers generated by leasing on 09.11.17.
As shown in the sheet, although the Dacia is cataloged at over 30,000 PLN cheaper than the Citroen and 5,000 PLN less in transactional value, when leased with a high residual value, the entrepreneur saves even 200 PLN gross per month. This happens due to the difference in the residual value – for the Dacia, it's 32.12%, while for the Citroen, it's as high as 60%. In this specific case, the difference is due to the demand for the Berlingo in the secondary market.
Components
Such a large difference in the installment allows for additional financing of car servicing costs. Some banks offer a maintenance package included with the financing, but it's also possible to choose a package at the dealership. In the example above, after adding the full maintenance service required by the manufacturer, the installment was still lower than for the Dacia without the maintenance package, amounting to 743 PLN net / 914 PLN gross.
Additional costs to keep in mind
Every financial product commonly referred to as a lease includes a predetermined (set at the simulation stage) mileage for the vehicle. This is the basis for calculating the residual value. If the agreed-upon mileage is exceeded, the bank will require an additional payment according to the rate specified in the contract.
Another important factor is the car’s wear and tear, for which the user is responsible. When opting for a lease, it is essential to familiarize yourself with the bank’s acceptable standard wear. At the end of the lease, during the car’s return inspection, an appraiser will assess whether the car has been damaged more than what is acceptable by the bank. In the case of significant wear, such as scratches on the body or damaged interior parts, the user must cover the cost of repairs themselves.
In summary, when deciding to purchase a new car, we must always consider its depreciation. If a company benefits from a predictable cost, such as the monthly payment for the car, and the owner wants to avoid expensive servicing for high-mileage vehicles or cannot afford interruptions in fleet mobility, then long-term rental is an excellent opportunity to achieve these goals. Additionally, it is the most convenient way to acquire a car. We do not have to buy the car for the company or as an individual to avoid tax costs, and most importantly, we do not tie up company funds by paying off the full value of the car. Long-term leasing allows for a zero initial payment, and banks are often willing to approve this type of financing even for new businesses. We pay the absolute minimum, covering only the cost of using the car, and thereby paying for its depreciation.
If long-term rental raises any doubts or questions, feel free to contact me.
