Look before you lease

Spotting a luxury car — be it Mercedes Benz, Aston Martin or BMW — can often tempt individuals into ultimately owning one. To the well-heeled, there are good chances that this will become a reality. And for the rest are these ingenious leasing schemes.

A hoarding near the International Airport in Chennai screams that you could drive a Mercedes car by paying only ₹9 lakh as down payment and ₹65,000 as EMI. At this EMI, it looks as if it is within the reach of a 29-something working professional earning ₹20 lakh a year. However, don’t fall for the trap.

Car models in the luxury segment in India range from tens of lakhs to a few crores of rupees. By that logic, the EMI should be much higher. So, how come you get to own a ₹35 lakh car at an EMI of just ₹65,000. Welcome to the world of leasing!

The ex-showroom price of a luxury car, for example, Mercedes Benz CLA or BMW 1 series is about ₹35 lakh each. So if you were to go in for an outright purchase, the EMI will come to ₹90,000 for a four-year loan. However, if you take the leasing option, the down payment is just 5 per cent while the EMI comes to about ₹65,000 for another four years.

Why is that so? This is because you don’t own the car in case of a lease option. The car advertisement that we were talking about is actually a leasing option. And, moreover, after the end of the lease period, if you want to buy the car, you will have to pay a hefty sum that’s equal to the market value of the car at the end of four years. The leasing company usually quotes the latter amount upfront and, in this case, it is about ₹16 lakh.

So in a sense, if you signed the leasing agreement thinking it is affordable, there is this delayed time bomb waiting to explode. Moreover, there are many other costs that the buyer should be aware of. Back of the envelope calculations indicate that the leasing option actually results in an effective interest rate charge of 13 per cent per annum. This is higher than the ongoing car loan rates of close to 11 per cent per annum.

Moreover, the price that’s quoted is just ex-showroom. The on-road price is what actually matters, which is often 20 per cent higher than the ex-showroom price. The ex-showroom price includes the dealer’s procurement cost from the manufacturer and the tax paid to the state government. On-road price, in addition to the ex-showroom price, also includes road tax, insurance and other registration charges.

Car insurance is anywhere between ₹1,20,000-1,50,000 every year based on the coverage that you seek. Moreover, there is the annual maintenance cost ( or on driving 15,000 km) of close to ₹35,000. When these additional costs are factored in, you end up poorer by ₹15,000 at the end of each month. For the uninitiated, the EMI, insurance and maintenance proportionately increases as you decide to opt for higher priced car.

Subsuming the insurance and maintenance cost as part of his monthly EMI, he may have to shell out nearly half his salary as EMI. This is in addition to nearly half the buyer’s annual income paid as upfront payment. And in case he or she wishes to buy the car at the end of the lease period, he has to shell out around 80 per cent of his annual income.

Last but not the least, the worrying factor is when he decides to forfeit his EMI payment during the middle of the lease period. In such a case, you may have to pay a hefty penalty to surrender the car. So, on top of your economic problems, you may actually sit on a pile of debt that you never intended to.

So, decision to indulge and stretch beyond your means should be thought out in tandem with your other long term financial goals.

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