It can be challenging for fleets to determine whether to lease or buy their fleet vehicles, but it’s a decision all fleet managers must make. By default, many fleet managers purchase brand new fleet vehicles without weighing their options carefully. As with any major business decision, it’s important to understand both options thoroughly before coming to a conclusion.
When buying a new vehicle, many seek out the most fuel-efficient option at the time of purchase. Some fleet managers purchase hybrid or electric vehicles to save even more money on fuel. New vehicles are also safer since they include the latest safety features. Fleet managers can also avoid vehicles with wear, tear, and mileage by purchasing rather than leasing.
Despite the benefits of ownership, there are many reasons some choose fleet vehicle leasing over purchasing new vehicles every 3-4 years. Here are some of the factors you should consider when deciding whether to purchase or lease your fleet.
What is a Fleet Vehicle Lease?
A fleet lease is similar to financing a vehicle, except there are additional terms between the lessor and the lessee. These terms usually include a set number of months or years that the lessee can use the vehicle(s), as well as a maximum number of miles approved for use. Typically, lessees pay a fine for going over that mileage. They may also face fees for additional wear and tear beyond the limits of the contract. Some dealerships may offer a deal for fleets that lease multiple vehicles.
A few different types of leases are available for fleets, including an open-end lease and a closed-end lease.
Open-End Lease
Fleets with temporary vehicle needs are more likely to choose this type of lease. The lease typically ends after just one year, but because it’s open-ended, it may continue for months after. There is no long-term contract, which is a significant benefit for fleets that are unsure of their vehicle needs, want to test different vehicles, or don’t continuously need vehicles.
There are some drawbacks to this type of lease, such as a terminal rental adjustment clause (TRAC). This clause is standard in many open-ended fleet vehicle leases. It forces the lessee to ensure the vehicle’s defined resale value. If the lessee can’t live up to this, it may mean an additional charge. Vehicle maintenance is also not included in this lease — meaning it’s up to the lessee to ensure the vehicle remains in good condition.
Closed-End Lease
A closed-end lease is a popular choice for fleets that need fleet vehicles on an on-going basis or have plans for growth in the future. It’s also great for new fleets that face capital restrictions.
These leases typically cover a three to four-year period and will have restrictions such as the number of miles permitted before additional fines. While this type of lease does cost more monthly, it’s often chosen more frequently due to the lack of a TRAC. Essentially, the lessee isn’t responsible for the depreciation of the vehicle and cannot be held accountable for the normal wear and tear.
Considerations for Leasing vs. Buying Fleet Vehicles
One of the most considerable drawbacks of leasing a vehicle is that you never actually own the vehicle. You’re essentially renting it, so you have to maintain it to specific standards. This requirement can be difficult for many fleets since drivers commonly use their vehicles all day, every week, adding up to a lot of wear and tear. But this is also the main reason many fleets lease their vehicles. Vehicle life-cycles are typically 3-4 years, which is the length of an average closed-end lease.
For fleets that own their vehicles, they’ll still need to replace those vehicles in that length of time. Leasing helps fleets avoid safety risks and reduced efficiency. Leasing a corporate fleet vehicle can also help teams avoid the expense of purchase and repair costs.
Besides replacement costs at the end of the life cycle, there are other considerations:
- Vehicle lifecycle management
- Administration costs
- Repair costs
- Loss of tax benefits by leasing
- Depreciation
- Long-term costs
- CSA scores
- Insurance scores
Benefits of Leasing a Vehicle
There are many benefits of leasing new or used fleet vehicles, just as there are benefits to purchasing vehicles. Leasing benefits may outweigh ownership for some fleets, and it’s a popular choice for fleets of all sizes. Here are some considerations you should be aware of:
Tax Relief
Fleets enjoy the relief of several tax benefits, such as mileage and fuel deductions. But they can also take advantage of other vehicle-related expenses, such as repairs and leasing costs. The company must prove they’ve used this vehicle for business at least 50% of the time to qualify for this advantage.
Reduced Costs
Vehicle loans are expensive, but leases tend to be more affordable. If you’re just starting a fleet business, a lease may allow you to save money until you increase your capital. For more established fleets, leasing can be a good option for staying on budget when times are lean.
Upgrades
When they purchase a vehicle, most fleets will keep it longer than a typical lease term because they have too much negative equity to upgrade sooner. Keeping your vehicles beyond their reasonable life cycles means that you can’t reap the benefits of an upgraded fleet. Fuel efficiency will decline, and you’ll miss out on the latest safety features. On the other hand, with a lease, you can simply switch to a newer model.
Efficiency
Along the same lines as upgrade potential, owned vehicles are more likely to remain in your arsenal long term. This is a benefit for many companies, but this isn’t ideal for fleets that use their vehicles constantly. You want your vehicles to run at maximum efficiency, but after three or four years on the road, they begin to lose efficiency and need more vehicle maintenance. Leasing a vehicle takes care of this issue by replacing old vehicles with new ones.
There are plenty of benefits to buying a fleet vehicle, but leasing benefits may outweigh ownership, depending on your fleet’s unique needs. For fleets that experience high wear and tear and shorter vehicle lifecycles, leasing may be the right choice. To learn more about leasing fleet vehicles and how telematics can help your fleet save even more money, visit Azuga.
