Making the decision to own, lease or rent a vehicle can be tricky. Chances are you’ve had to make this choice in your personal life with your own vehicle, but when it comes to company fleets there’s more to consider. We’re here to explain the basics of what you need to know before jumping into a new vehicle commitment.
What’s the difference?
First, some basic definitions:
Ownership of fleet vehicles means they belong to the company that purchased them, period. The company pays for them in full, and later, when it’s time to sell them, the company keeps the money from the sale.
Leasing involves making regular payments on new vehicles (usually set up monthly) for a specific amount of time or a “term.” A term typically lasts three to five years. When the term is over, the vehicles are returned. What happens at the end of the lease depends on which type of lease the company chooses – closed-end or open-end.
Closed-end leases are pretty straightforward: there is a fixed term and as long as the vehicle is in good condition and hasn’t gone over the set mileage cap, the company walks away when the term is done.
Open-end leases are a bit more complicated. With an open end-lease, the company is responsible for any difference in the value of the vehicle from what’s expected – its book value – when it’s returned.
Renting is borrowing vehicles for short-term use. This is usually done for a period of one year or less, but can sometimes even just be one or two days.
It makes sense to buy when…
Ownership is a good option when your company has enough money available to buy vehicles outright and that money isn’t needed for running other parts of the business. Buying vehicles might also make sense when interest rates are high. High interest rates can make leasing and the costs of borrowing less ideal.
A significant downside to buying, however, is that your company is on the hook for any repairs and the wear-and-tear of the vehicle over time. Once a vehicle leaves the lot, its value will decrease as the years go on. Therefore, when a vehicle is eventually sold off, the money you get back would only be a fraction of what you paid for it.
It makes sense to lease when...
Leasing can be a good idea for a few simple reasons:
It lets your company save money. Down payments aren’t required when leasing. And because the vehicles aren’t being bought outright, your company only needs to make regular payments for the term of the lease. It usually ends up costing less than it would’ve cost to buy the vehicle – about one-third of the purchase payment. That savings can be better used in other parts of the business.
Your company doesn’t have to deal with repairs on older vehicles. When the lease term is over, and the vehicles have built up some mileage and are maybe getting a bit run down, they are returned. Usually companies will then choose to lease newer vehicles and start the process all over again.
There are tax breaks to leasing! Payments are tax deductible – and this is always good for business.
It makes sense to rent when…
Renting makes sense if your company needs flexibility in running its fleet; adding extra vehicles to cover regular busy seasons or for the odd short-term busy period. Renting for these periods provides your company with the extra vehicles you need without the financial commitment to a larger, more permanent fleet.
All deals are not the same
Whether buying, leasing or renting, fleet managers have to pay close attention when they are signing a contract. Important details are in the small print and no two companies will work the same way! A good partner will sit down and help you sort out what you need for your business. This way, you only get what you need and don’t end up wasting money on stuff you don’t. The decision ultimately comes down to your company’s specific vehicle demands and the funds available to put towards the investment. Make sure you do your homework, both internally and externally, before making the commitment to own, lease or rent your next fleet vehicle.
This also includes doing your research on the vehicles you’ll be investing in. Be sure to check out our post: 6 Steps to Better Fleet Vehicle Selection, as you begin to expand your fleet.
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