Rent, buy or lease a car: Which is more cost effective?

Dubai: Choosing whether to lease a new vehicle instead of buying it largely comes down to priorities. For some drivers, leasing or buying is purely a matter of money.

For others, it’s more about forming an emotional connection to the car. Before choosing which road to go down, it’s important to understand the key distinctions.

Are you better off owning an asset – even if it is a depreciating asset like a car – than paying rent on one? Are you willing to take on the tasks of comparing and acquiring the right insurance; renewing the registration annually; finding the right maintenance package and taking the vehicle for regular maintenance?

Buying vs. Leasing a Car

When you lease a vehicle, you're basically renting it from the dealer for a certain length of time. That's usually 36 or 48 months.

Once your lease period ends, you have the option of returning the vehicle to the dealer or purchasing it at a pre-determined amount, which is defined in the lease contract.

That's a lot different from buying a car. Buying it outright means you own it after the loan is paid off.

Getting your own car comes with a lot of convenience as well as costs. While a car is an asset, it is a depreciating one which requires insurance, registration, annual tests, maintenance and repair with time.

Not to mention additional costs in case of an accident if not covered by insurance. For a car purchase, you have to pay 20 per cent of the value as down payment while the rest can be covered by a car loan.

Factoring in insurance costs

Insurance companies factor in your age, age of your UAE driver’s licence, accident/fine history, gender, type of vehicle and age of vehicle before giving you an insurance rate.

For example, if you get the car within the first year of getting your driver’s licence, insurance premium can go up by as much as 25 per cent of the original amount. If you get into an accident, premium can go up.

At the same time, if you get an SUV, there is an applicable 10 per cent discount on premium given by some firms in the first year. The rates depend on the car, your insurance provider and your driving history.

Insurance is either comprehensive (covers your car, vehicles involved, injuries to yourself and theft) or third-party which covers your injury or death and damage to other vehicles involved. The latter does not cover damage to your car. You can choose to have additional coverage, such as passenger coverage, for an extra amount.

The UAE’s Insurance Authority releases maximum and minimum rates applicable to car insurance periodically. In 2017, the authority set the maximum insurance rate for sedans (or salon cars) at 5 per cent of the value and 7 per cent for four-wheel drive vehicles.

When choosing an insurance policy, your type of car and the availability of spare parts or ease of maintenance should be factored in. This is critical if you don’t want ‘agency repair’ or repair from the manufacturer, which could be expensive outside of warranty.

Renting a car

Many people choose to rent cars in the UAE on a monthly basis. The renting process can save a lot of headache in terms of insurance, registration, maintenance and service but can be more expensive than owning one’s own car. Another advantage is the ease of getting to try a new vehicle or model with no qualms about long-term expenses or resale value.

At the end of the rental period, the car is checked for any damage which could be deducted from the deposit amount, which puts some pressure on the customer.

Usually the car rental on a monthly basis is much higher than monthly payments for your own car. Some rentals also come with distance restrictions, for example if you go above 2,500 kilometres in the month, you have to pay an extra amount per kilometre over the limit.

However, the definite advantage come in when you need to leave town on short notice or if you don’t want to get committed to ownership of a car in the UAE. Resale, registration, annual tests, service – none of it would be your concern if it was a rental.

Leasing a car

Any rental 12 months or above is considered a lease and is more time and cost-efficient for many residents. These contracts could be cheaper than monthly rental as it is for a longer period of time. This kind of contract also may come with a distance restriction and additional payment for crossing the restriction.

For a sedan with the same conditions, lease price is around Dh1,400 per month, similar to the monthly payment if you were to buy the car (Dh1,423 per month). The purchase price for your own car, however, is not inclusive of registration, service, annual tests etc., which are required for owners.

There is, therefore, a definite advantage in leasing in terms of cost, especially if you like to switch cars up yearly or if you don’t want to be burdened with ownership and resultant costs.

Perks and risks of leasing

Key advantages of leasing are as follows:

• Comparatively equally priced as owning a car

• No burdens of insurance, registration, routine service or maintenance

• Free delivery by most companies

• Ease of driving your dream car without the liabilities of owning one

• Because of the longer lease, up to 3 years for some brands, it is like owning your own car.

The risks include the following: You pay almost as much as the price for buying the car but have no asset to sell or recoup value. Also, there is a longer contract period involved, so it is not as easy to break the contract. Finally, a risk is that there is no investment value.

Knowing your TCO is vital

Do you end up paying more per month for the luxury of having someone else take on these tasks for you? The answer lies in the concept of TCO, or Total Cost of Operating an asset (also called the Total Cost of Ownership).

The TCO comparison – typically performed over a fixed period, like two, three or five years – includes: Purchase price, Tax, Annual registration, Extended warranty (if any), Financing, Annual insurance, Fuel, Maintenance, Repair, Depreciation (typically at 20 per cent of the asset’s value each year).

Usually, when you finance the purchase of a car instead of paying for it yourself, you run into two obstacles: The monthly pay out will most likely be higher than what you would pay to lease the same model.

There may come a time when the “upside-down phenomenon” comes into play. This is when you end up owing more on your financing than the true value of your vehicle!

Understanding the time frame is key

Doing the math tells you that it is cheaper to lease a vehicle if you plan to use it for five years or less. If you plan to use the car longer, then it’s more cost-effective to buy one.

EXAMPLE: TCO OF AN OWNED SUV IN THE UAE (AED)

EXAMPLE: TCO OF A LEASED SUV IN THE UAE (AED)

NOTES: 1. Does not account for inflation. 2. Does not account for financing cost. 3. This table is indicative and may be used only for the purpose of illustration; actual numbers may vary.

This clearly shows that if you own a car for about five years, you end up paying the same amount as you would have if you had leased it, plus you get some money back when you sell it.

Key takeaway?

Speaking pure economics, a second-hand car not more than two years old and with low mileage is a great option to help avoid depreciation costs of buying a new car.

Speaking pure car-lover language, leasing cars is a great option if you can afford it as it is only as costly as buying a brand new car with no major strings attached. For long-term use, renting monthly is not a good option but can come in handy for any transitional phase before getting your own car or lease.

If you intend to stay in the UAE for more than 10 years and know the car you love and want long-term based on your usage, get a brand new car.

As per our research, the final verdict is up to each individual and his or her personal desires or needs when it comes to ownership of a vehicle.