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Leasing vs buying: 4 preconceived ideas deciphered for you
New car registrations jumped by +18.9% in July 2018 and this trend seems to be continuing in France. The electric cars are also the most promising cars.
If 2018 was a year rich in new registrations for the car market, it is likely to be even more promising for 2019.Between new productsmanufacturer's sideIn the light of the ever-changing French legislation, fasten your seatbelt to decipher the 4 preconceived ideas behind this eternal debate:should you buy or lease your next car?
Myth no. 1: Leasing is expensive
Buying an electric car is a major investment in time and money. Cars are still the third biggest expense for French households. And with a new car come new surprises: servicing, maintenance and insurance. Not to mention depreciation....
All these expenses are a cause of stress and do not allow you to stabilise your car budget.
Very often, it makes more sense to lease than to buy a car. No down payment, no stress. The promise of leasing is that you no longer have to bear the risk of loss of value, mechanical or other breakdowns, or changes in legislation, and you can keep your budget under better control. Leasing means a new car, all included.
Myth No. 2: Leasing is a scam
This is of course not true. Leasing contracts are generally all-inclusive: servicing, maintenance, financial loss... And always a manufacturer's warranty. Some people get caught out and curse car leasing, but it's generally more cost-effective to take out a leasing contract when you want a new car.
That said, caution is advised: before signing a leasing contract, it is very important to read between the lines to ensure that the monthly instalments paid are commensurate with the services included in the lease.
Whether it's a long-term rental (LLD) or a lease with purchase option (LOA), the research phase is very important: it allows you to compare the different quotes and to gauge every aspect of the terms of the contract you are going to sign. Your future car will generally be a 48-month contract, so you need to make sure that the contract you choose is the right one.
Myth no. 3: It's better to buy a new car than to lease one
This is true and false. It depends on the model and how you use the car. If you're a heavy road user, there's no point in buying a car: after 4 years, the residual value of your vehicle will be ridiculous, and long journeys will have worn out your car, costing you a fortune in maintenance and servicing. Your new car will have cost you a great deal of time and energy, only to be worth nothing after just a few years. A leased car, in this case, would have been a good idea: you won't have paid anything in upkeep and maintenance and you won't be taking any risks, given the number of kilometres you've driven. Do you want to change your car regularly?
Myth no. 4: There's no point in spending money if you don't end up owning your own home.
False. On the one hand, as part of a leasing contract, it is possible to have a purchase option or LOA, which is an alternative financing solution to the simple hire of a car. In this case, the leasing contract allows the lessor to keep all its options and buy the car back at the end of the contract.
🔍Example: Imagine you buy a Clio Diesel in 2014 with an option to purchase. It's 2018 and your 48-month leasing contract is coming to an end: in view of new legislation and the anti-diesel policy, your Clio won't bring you much at resale. In this case, it's a good idea not to exercise your purchase option and to return the car to the lessor, as the residual value of the vehicle will be higher than the resale price.
On the other hand, owning a car is not necessarily the Holy Grail. Unlike property investments, it is very rare for a car to increase in value over time, so it makes little sense to invest a large sum of money and consumer credit with interest in an asset that will inevitably lose value.
To sum up, leasing suffers from a poor image in France, due to non-transparent charges on offers, whereas in most cases it can avoid a number of surprises and save leasers money. As well as being able to move upmarket (like buying a property versus leasing), it also means that you can stick to a fixed monthly budget and offer peace of mind to motorists, who can simply enjoy their car without having to look after it. All in all, car leasing is an option that should not be ruled out.
The golden rules for a successful electric car lease
Transport is the third largest item of household expenditure in France, after housing and food. Vehicle-related expenses have a major impact on household purchasing power. That's why it's vital to choose your leasing contract carefully, and to follow these few rules so that you can look forward to finding and owning a vehicle through leasing with complete peace of mind.
Rule no. 1: Identify your needs
It may seem obvious, but it's crucial to determine how your next vehicle will be used.Leasing is first and foremost a contract.The contract commits the tenant for a fixed term(for example 48 months).The leasing contract includes a monthly rental payment, services on offer and a set mileage.If you exceed the stated mileage at the end of the contract, you will be subject to penalties per kilometre exceeded.In this case, if the odometer reading is below the forecast, you will not receive any reimbursement and your monthly payments would have been lower.
In addition, we have already seen the different types of car leasing, including long-term leasing.(LLD)or lease with purchase option(LOA)discussed in this article.These different financing solutions help you choose your new car.
So what are you going to use your next car for?Be the main vehicle in the household or fetch the bread on Sundays?
💡Did you know? The average mileage driven per car per year is 13,500 km according to INSEE.
Rule No. 2: Patience is key
Now you know your budget for your leased car. So which one will you choose? Leasing is a sea full of offers. There's everything you could possibly want: new, second-hand, hire with or without a purchase option, offers on the internet or in dealerships, with or without a deposit, and so on. So you need to be patient and take the time to find "your contract". Patience is crucial to the success of your leasing.
Rule no. 3: Read the terms and conditions of the contract carefully
Now we're getting close:you've found the right rental contract for your needs.The big question we often ask ourselves is:what services will be included in our contract?Don't be too hasty, it's your vehicle, so analyse it carefully.small *the terms of thecontract.We are all too familiar with call advertising "from129/month" ;to sign his contract at299/monthover 4 years.Sometimes the same vehicle can be rented at two different rates.
On the red side, don't get it: start-up and registration costs, penalty, assistance and maintenance, insurance and tyres. On the blue side, the more expensive monthly payment includes : everything listed above except tyres.
Be sure to read the asterisks in the contracts, and take out your calculator.And don't forget, the most expensive part is maintenance. Get calculating!
So be careful not to sign a contract by jumping at the first offer that passes under your nose.
Rule no. 4: The customer is king
We've said it before and we'll say it again: leasing is a sea full of offers, and one of the advantages for us consumers is that we can play the competition off against each other. After doing your research, you've found two companies offering the same services but for a different rent. Well, the good news is that you're in a strong position. Why should that be? Because the market is full of offers and they want above all to satisfy demand (you), even if it means cutting their margins. This is the time to puff up your chest and compare the quotes you get to reduce your monthly payments.
What is the debt ratio?
Whether you want to buy a property or take out a car leasing contract, you first need to know your borrowing capacity before taking any steps. Here we explain how to calculate your debt-to-income ratio (which will enable you to work out your borrowing capacity) so that you can go through your financial study with peace of mind and enjoy your new car.
The debt ratio is - very often - used by credit or banking institutions to assess your theoretical repayment capacity. It compares your total income with the total amount of your financial obligations.
Debt ratio: what will change in 2022?
The Haut Conseil de Stabilité Financière (HCSF) has revised the conditions for granting home loans. Since 1 January 2022, the maximum debt ratio for anyone wishing to buy a property has been set at 35 %compared with 33 % previously.
In addition to this change, the maximum term of a property loan is 25 years. If you want to buy a new property or one that is the subject of a works programme, you will be able to benefit from an extra 2 years on bank loans, if the amount represents 25 % of the acquisition cost.
This rule was introduced to ensure that borrowers are able to repay their loans on time, thereby protecting them from over-indebtedness.
In addition, if borrowers have a rate higher than 35 %, the banks will only have to process 20 % of the files, in order to decide which borrowers can benefit from this exception.
Moreover, all banks are regularly monitored by the Autorité de Contrôle Prudentiel et de Résolution to ensure that they apply the new rules. If they fail to do so, they will be subject to financial penalties.
How do you calculate your debt ratio?
To find out your debt ratio, there is a simple formula:
Debt ratio = Charges (loans, rent, pension you pay) x 100 / Income (wages, grants, pensions received, rent received)
Here's a simple example to help you understand.
- You earn €2,500 and your rent + charges is €800.
- Your debt ratio is = €800/€2500 = 32%
In most cases, if your debt ratio is higher than 33%, it is almost impossible for you to be granted a loan or a lease. You'll have to think about other financing solutions for your car project.
To get an overall view of your debt ratio, you can do the following this simulation.
Tip: If you're aiming for a lease with no deposit, don't hesitate to make one to lower your monthly repayments and give yourself the best chance of obtaining finance for your vehicle.
⚠️ Most of the timethe rate of 35 % can be insignificant if you have enough money left over to live on.
Good to know: The "reste-à-vivre" is a key indicator of a household's standard of living, particularly when it comes to assessing its debt capacity. The amount left to live on is what a household has available to live on for a month, once its fixed expenses have been paid.
Yes, but what's that got to do with me?
The debt ratio enables credit institutions to decide whether or not to finance your car. The debt ratio is used by virtually all companies that grant loans, whether in the form of a personal loan, a mortgage or any other financing plan. It determines whether or not you are eligible for credit.
What is included in my income?
All income is likely to be included in income:
- Salaries
- Pensions (state or post-divorce)
- Aids
- Rent received if you own a property
What is not included in my income?
Some income is not taken into account when calculating the debt ratio.
- Income from the activities of a micro-enterprise or auto-entreprise (in most cases)
- Invalidity pensions (in certain cases)
- Income that is too recent (not shown on a tax form)
- Of course, income from an undeclared activity
- Income from abroad
What is included in my charges?
When we look at your long-term leasing (LLD) or hire purchase (LPO) application, we are likely to take into account a number of so-called fixed charges in order to calculate your debt ratio.
- Amount of rent
- Housing costs, including insurance, water, electricity and heating, etc.
- Property loan amount
- Pensions payable, if any
How can I improve my debt ratio?
In most cases, if the debt ratio is more than 35%If you don't have a car, it's almost impossible to get a loan or lease. You'll have to think about other financing solutions for your car project.
In fact, here's three solutions available to you in this case :
- You can renegotiate your current loan (e.g. your mortgage) and smooth out the repayments over a longer period. The longer the repayment period, the lower the monthly repayments and the lower your debt ratio.
- If you can, you can repay your consumer loans. In fact, if these loans are not repaid in full and they are added to your charges, your file will be penalised.
- It is possible for two people to take out a leasing contract: this will increase income and reduce costs. Your budget for taking out a leasing contract will be higher, and you will be able to enjoy a leased car together. When you sign the contract, both names will appear on it.
- You can also call on the services of a professional in this field, who can give you sound advice on how to reduce your debt ratio.
The debt ratio enables credit institutions to decide whether or not to finance your car. The debt ratio is used by virtually all companies that grant loans, whether in the form of a personal loan, a mortgage or any other financing plan. It determines whether or not you are eligible for credit.
