What is more advantageous leasing or car loan?

Leasing is a fairly young form of financing, yet it gained a large group of supporters very quickly.  The leasing industry in Q1, 2018 grew by almost 21%. Why is it so popular? Is it better for everyone than loans?

In leasing, the lessor lends to the client (lessee) a given item, e.g. a car. This form of financing has become popular because it has much easier procedures and a greater limit on creditworthiness. In this form of financing, leasing concerns the purchase of unused cars, and the entrepreneur does not immediately become the owner of the vehicle. The financing period is in the range of 24-60 months, the lease instalments are large but there is a possibility to recover the tax. When choosing leasing as a form of financing for a company, we have two options to choose from: operating lease and financial lease. Nearly 80% opt for operating lease. This is because operational lease is straightforward and gives greater tax benefits. The entire lease instalment is treated as a cost, which allows entrepreneurs to add it to tax deductible expenses. Financial lease, from the point of view of taxes, is very similar to loan, which is why it is very rarely selected.

Operating lease:

• Obligation to amortize by the lessor
• Contract duration longer than 40% depreciation time
• The tax deductible expenses include the entire instalment plus interest
• VAT is added to leasing instalments
• The purchase is dependent on the amortization rate and the purchase period

Financial lease

• The obligation to amortize by the lessee
• Duration of the contract over 12 months
• The tax deductible costs include only interest and depreciation
• VAT is paid in advance along with the first instalment
• With the last instalment, the item becomes the property of the lessor

An entrepreneur who is thinking about buying a car often has a problem to choose: credit or leasing. The banks’ requirements when choosing a loan are much stricter, the creditworthiness of the company applying for it is checked thoroughly.  Banks are reluctant to grant loans to companies operating on the market for less than two years. The financing period can reach up to 120 months, the loan instalments are lower but the long loan period is associated with higher interest rates. When choosing a loan, it is worth remembering that only the interest rate and amortization of the purchased car become the tax deductible. The choice of credit also has advantages such as the ability to buy a used car, and the purchased car immediately becomes the property of the company.

Operating leases and bank loans are the two most popular methods of financing the purchase of cars by entrepreneurs.  Leasing has become popular at a very fast pace, because it is much easier to access (especially among newly established companies). After summing up all costs, it can be noted that operating leasing is cheaper than a loan. Both financing options, however, have a rich set of advantages and disadvantages. The choice depends on the situation of a given company. For one, these advantages will be perceived as beneficial, for others it may be considered a drawback. Therefore, every entrepreneur interested in buying a vehicle for a company should answer the question on their own – which form of financing will be the most profitable?