When we think of possessing a vehicle, the first thing that comes to our mind is to purchase (new or old). And, in such cases, the decision to be made is straight forward when it comes to arranging the money to buy a car. If someone has enough savings, the individual can pay in cash. And, if not, taking a car loan from the bank or from the financial institution that has partnered with the brand selling the vehicle. And in most cases, getting finance from the financial institution is the easiest and more affordable option although it is charged differently and generally the interest rates are high.

But there are alternate ways of partially owning the vehicle i.e. “Leasing” and “Renting”; although each has its own pros and cons.

What is leasing and how does it work?

Leasing is the long-term rental of a vehicle with a subsequent option to purchase. This financing formula consists of the transfer of the use of the vehicle in question by the company that owns it. This agreement has a fixed term of minimum 24 months (although now flexible options are available) and the user gets access to the vehicle of his/her choice in exchange for the payment of a monthly installment during this period.

During this fixed term, the person owns the vehicle. And when the agreed period ends, they have an option to return the vehicle or completely buy it at the price agreed in the contract, which consists of the residual value of the vehicle.

Advantages and disadvantages of leasing

This type of business deal is very common among the self-employed and small companies. Initially, the vehicle had to be used for the development of the company requesting it. But nowadays even individuals are opting for vehicle leasing.

Also, in the case of leasing, there is a possibility of tax deductions for all the installments – which are usually lower than other types of financing-, both in terms of amortization and interest on the operation. Finally, with leasing, an individual must take care of all the expenses for using the vehicle i.e. maintenance, insurance, repairs, etc.

What is renting and how does it work?

Renting is a vehicle rental is similar to leasing. Individual has to pay monthly installments to the company that owns the vehicle. But in case of vehicle renting, it is not possible to buy the vehicle when the contract end. And the person has to return it.

Renting – Pros and Cons

The main advantage of renting is that everything related to the maintenance of the vehicle is the responsibility of the owner, which in this case is the company that lends for a certain period of time. Therefore, an individual does not have to pay for insurance, maintenance, breakdowns, taxes, fines or even tires, and only have to worry about refueling when necessary.

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].