Renting or leasing? The keys to two alternatives on the rise to buying a car

In recent years, both renting and leasing have substantially increased their number of registrations.

We live in an era where mobility is not understood the way it was a few years ago; the rise of carsharing and services such as Bla Bla Car have highlighted this reality. Today, owning a car is not the only option available to us; in fact, in many cases it is not even the most economical. For this reason, before buying a car we should consider the alternatives that exist. This is where renting and leasing come in strongly, especially because of the different tax and usage advantages they offer.

In recent years, renting has experienced very significant growth in our country. Registrations of renting vehicles went from 104,462 units in 2014 to 170,690 units in 2015. The following year that figure rose to 205,578 units, while in 2017 registrations reached a new record: 248,602 units.

Something very similar has happened in the leasing sector, where CaixaBank (the institution has an 18% market share of leasing production) has carried out more than 9,500 new vehicle leasing operations in 2017 worth 934.8 million euros, 75.9% more than in 2016.

It is clear that renting and leasing are options to consider, but are they a good alternative for me? How do they differ from one another? What advantages do they offer? Which one suits me best? Keep reading and we will resolve all your doubts.

What are renting and leasing?

– RENTING: it is a medium/long-term car rental modality where all vehicle usage costs are usually included (maintenance, insurance, roadside assistance, registration tax, etc.). The contract typically has a duration ranging from one to ten years, although there may be exceptions to this rule; the company LeasePlan offers vehicles for renting over periods of one month. With renting there is no possibility of buying the vehicle once the contract ends, although it can be agreed with the rental company.

–LEASING: it is a long-term car rental modality, but in this case the vehicle usage costs are borne by the driver, that is, if the car breaks down you would have to repair it with your own money. The major difference of this modality compared to renting is that it usually includes a mandatory purchase option in the contract, which takes effect once the contract ends. Furthermore, the rental period is usually longer than that of renting.

Who can opt for a renting or leasing contract?

Before you start looking for leasing cars you should read this, since to opt for this modality you must meet a series of employment requirements. Leasing regulations require that the rented vehicle be linked to the professional activity of the vehicle user. For this reason, leasing can only be contracted by self-employed workers and companies.

On the other hand, renting can be contracted by any legal or natural person, therefore including any private individual.

Differences between renting and leasing. What advantages does each one offer you?

What does the monthly fee of each one cover?

The renting fee usually includes all acquisition costs (registration and circulation taxes), MOT inspection, insurance, tyres (whether replacements or punctures) and full maintenance of the vehicle (both periodic servicing and fault repairs). In short, all vehicle costs are included in renting, so all the worries and unforeseen events that come with owning a car are exchanged for a monthly fee. Furthermore, the fee remains fixed for the entire duration of the contract, unless you accumulate a significant list of accident-related parts, in which case the company could make an adjustment to the coverage.

As for leasing, the monthly fee covers the cost of the vehicle, taxes and its financing, but not usage costs. All vehicle maintenance is the driver’s responsibility, as is insurance in many cases. When considering leasing, it is important to bear in mind that the fee may change slightly as a result of adjustments to the interest payable on the vehicle’s financing.

Contract duration

In general terms, the duration of a renting contract is much more flexible . Contracts usually have a duration of between 1 and 5 years, although there are companies such as LeasePlan or Arval that offer contracts without a stipulated term, that is, you pay month by month and renew as you need. With this renting modality you can return the vehicle at any time without penalty, although it is true that this flexibility comes with a higher cost compared to longer-term rates.

What happens if I cancel a long-term renting early? This can be done, but you must pay an agreed compensation initially set out in the contract. Normally this amount corresponds to a percentage of the remaining instalments.

As for leasing, regulations require that contracts have a minimum duration of 2 years. Officially, such a contract cannot be cancelled during the period in which it is in force, but it is possible to stipulate with the leasing company a minimum period during which the contract could be revoked early under agreed conditions.

Once the contract ends, what options do I have?

Renting offers two options:

– Extend the contract duration

– Return the car

In the case of leasing there are up to three alternatives:

– Extend the contract duration

– Return the car

– Exercise the purchase option

Tax differences

Both renting and leasing offer certain tax advantages over financed purchase of a vehicle, especially for self-employed workers and companies.

As a form of rental, renting turns monthly fees into an expense, which means all professionals who opt for this modality can deduct the full amount they pay for the car, including VAT. For example, if you are self-employed you may be able to deduct up to 100% of the renting fee in your income tax return, as long as you demonstrate that you use the vehicle for your professional activity. In this case, you could also claim back 50% of the VAT corresponding to the renting operations.

In the case of leasing, VAT corresponds to the total price of the vehicle, while the monthly fee can be deducted from corporation tax or income tax. If the purchase option for the vehicle is exercised, it would be accounted for in the same way as a sale and purchase transaction.

Which option suits me best?

When deciding between renting and leasing you must consider your needs. If you are self-employed and tend to change cars frequently, renting is a great option. The major advantage of this modality is that it spreads the risk of unforeseen events (breakdowns, punctures) and the contract can be cancelled with considerable flexibility; on the other hand, it is not usually the most economical option if you keep the car for many years.

On the other hand, leasing is very interesting when you are not sure whether you want to own a car outright. It is the same concept as renting a house with an option to buy: what if you later discover it is your dream house? Leasing allows you to test the quality of a car over a long period of time, after which you will know whether you really want to keep that car for a few more years.

Finally, we cannot dismiss the option of buying a vehicle outright. You should consider this alternative above all if you plan to keep a car for many years. If you sell a car shortly after buying it, you will lose a significant part of the investment, since cars lose their greatest percentage of value in the first years of ownership. Think of buying as a future investment: once you stop paying the financing you can forget about monthly instalments and the vehicle will be yours.