Why it is cheaper to lease a car than buy

A fleet of vehicles on the road. Leasing makes more economic sense than buying.

By James Kogi

The flying car is here with us. It was recently tested by the makers Klein Vision between two airports in Slovakia on their 142nd successful landing. This means in the future year 2045, one will be able to leave your house in Nairobi, drive to Wilson Airport, get ushered onto the runway and take off in your flying car to Moi  International Airport Mombasa. You can drive into Mombasa City to work for the rest of the day and be ready for a return journey home in the evening. 

Unmanned cars are also with us. Tesla and other car manufacturers are busy carrying out live tests of the same. In the Chinese city of Zhengzhou, unmanned buses and taxis are now entering service and passengers can board them by way of an App.

Which begs the question, why do we all go for car ownership? With advances in technology and with many options coming on the table, it may be time to start reviewing car ownership. It is said that if an asset appreciates over time, own it. But if it depreciates in value over time then it makes sense to lease or rent it. Over a period of 48 months, it would make sense to lease a brand new vehicle for the period after which you return it and take up another brand new vehicle of your choice.

The multiplier effect of such leasing would be immense in the economy in terms of job creation. The local content that would go into these locally assembled vehicles would include upholstery, seats, floor mats, bolts, plastic moldings and many other accessories and this would encourage cottage industries to grow in this country. These leased vehicles would also require service and maintenance and this would grow the network of new vehicle dealerships across the country as was witnessed up to the 1980s. Our medium and large garages would graduate to new car dealer status and thereby put their many years of experience to good use.

The onus is on the government to provide more incentives for leasing to become the preferred way of car ownership. Already various pieces of legislation have been passed in this regard to enable both national and county government agencies to lease vehicles, construction, and other high-value equipment but a lot more still needs to be done.

Most Kenyans, however, want to feel they own their cars. But an analysis of the true total cost of ownership shows otherwise. Taking the case of a typical brand new car costing Sh3.8 million, it would be interesting to compare the true costs over time.  Lease periods normally are for 4 years or 48 months and with bank interest rates pegged at 12.75% while other costs include a bank loan fee of 2%, comprehensive insurance of 4.5% and a total depreciation over the four years.

Assuming that at the end of the 4 year period the vehicle would fetch around 38% of the initial cost as a resale price, the monthly costs over the period, if one went for purchase, would work out to be around ninety thousand shillings while in the case of leasing the costs work out to be around eighty-eight thousand shillings.

Leasing is a very viable option and is currently employed by multinational organizations as a way for them to concentrate on their core business while leaving the logistics function to be handled by professionals. Remember that leasing usually comes in two options namely wet and dry. For wet leases, the vehicle maintenance costs are already factored into the monthly rentals while in dry leases these maintenance costs are incurred separately. Players in the leasing space are still few but these pioneers have played a leading role in entrenching leasing in this country. All the major new vehicle distributors in Kenya also now have leasing as an option for their customers.

It will be interesting to see how leasing can be implemented in the used car market where instead of purchasing your used car for private use or for taxi business, you lease one instead.

Over the next two decades, vehicle leasing is set to provide a good impetus towards the Big 4 Agenda since transport and logistics will remain an integral part of all these sectors of manufacturing, food security, housing construction and universal health care.

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