Travelling by car is relatively expensive. Today, there are various options available in addition to buying an automobile outright. The wide range of leasing, financing and subscription offers can make it difficult to make a decision.
This article presents the different options.
Each method of financing or purchasing comes with its advantages and disadvantages. In addition, in recent years, new offers have appeared on the market. That is particularly true of the current trend of car subscriptions. In this sea of options, how can one choose the one that best suits one's needs?
The options
The possibilities for obtaining a car can be summarised in four main categories:
Cash purchase
Leasing
Consumer credit
Subscription
Cash purchase
This is the traditional method of buying a car. The buyer and seller agree on a price, the buyer pays the amount in cash or by bank transaction to the seller, who gives him the registration papers in exchange.
Leasing
In leasing, the owner finances the vehicle through a leasing institution, which may be a bank or a specialized company. The buyer pays the depreciation of the vehicle and the interest in monthly instalments. It is not the buyer who owns the vehicle, but the lessor. However, the lessee obtains the usufruct of the vehicle and is responsible for the risks associated with its use. There are various leasing variants. At the end of a contract, it may be possible to extend it or switch to another contract or car.
Personal contract hire (PCH) The buyer never becomes the owner of the vehicle. They use it and pay the monthly instalments for the agreed period and then return the car to the lessor or garage.
Personal contract purchase (PCP) The basis is the same as in a pure lease. However, at the end of the contract, the motorist can purchase the vehicle by paying the residual value (balloon) mentioned in the contract.
Hire-purchase At the end of the contract, the lessee automatically becomes the owner of the vehicle. In short, the vehicle has been fully paid for over the term of the contract. For a comparable term, the monthly payments for a sales lease are generally higher than for other types of leasing because of the higher value of the loan. To avoid this, it may be advisable to agree on a longer contract.
Consumer credit
The purchaser obtains a loan from a financial institution and uses it to pay for the vehicle in the same way as for a cash purchase. He thus becomes the owner of the vehicle. The borrower then repays the loan according to the contract and pays interest. The interest rate for this type of financing is often high, as the vehicle is not taken as security.
Subscription
The car subscription is a relatively recent model. The customer pays a fixed amount per month which covers all expenses related to the use of the vehicle (tax, insurance, tyres, vignette, etc.) except for petrol or electricity. The car subscription is therefore transparent and allows for good cost planning.
Advantages et disadvantages
The previous paragraph has shown that there are numerous financing models for a vehicle. Each variant has its strengths and weaknesses:
Cash purchase
Advantages
No interest The buyer only pays the price of the vehicle and therefore does not have to pay interest on a loan.
Flexibility The driver owns the vehicle and therefore has greater flexibility. He can decide freely on the insurance cover and the duration for which he wishes to keep the vehicle. In addition, he does not have to worry about the annual mileage.
Disadvantages
Opportunity costs Opportunity costs are the income that a person has foregone by making a decision. In this case, the buyer invests a large amount of money in a car when he could have used it differently. In theory, it makes more sense to finance the vehicle if the money can be invested in a project with a higher return than the interest paid on the loan.
Hidden costs Most people think of the costs of running a car as just fuel. In reality, they are much higher and not transparent: tyres, insurance, vignette, fines, parking, etc. This makes it difficult to realise the actual cost of a vehicle per kilometre or month. As a result, the cost of a car is often underestimated.
Purchase costs Buying a car is a considerable investment that not everyone can afford. Also, it involves carrying a large amount of cash, which can be stressful. The risk of scamming is higher than for other options. Nevertheless, it remains low.
Leasing
Advantages
No investment The automobile driver does not need to take a large sum of money out of his pocket and can therefore dispose of this money freely (investment, covering other expenses, etc.).
Flexibility Today, there are many leasing options with or without a down payment and of variable duration. The customer can therefore adapt the contract to his needs. In addition, the vehicle can be refinanced at the end of the contract.
Vehicle A leasing agreement can allow the client to take a vehicle that he or she could not pay for in cash. In this way, it is possible to obtain a new vehicle without a large initial investment. This is interesting if the lessee has the income to pay relatively high monthly payments, but does not have the wealth to buy the vehicle in question (or the money is used differently). However, it is strongly inadvisable to finance a vehicle that is considerably beyond one's budget.
Sale In a PCH, the lessee does not need to deal with the sale of the vehicle. He/she only has to return the car (in good condition) to the lessor.
Disadvantages
Acceptance In order to obtain a lease, the customer must prove his or her ability to make the monthly instalments. For a self-employed person or a person whose situation is temporarily unstable, this may result in a rejection by the lessor.
Insurance In a leasing contract, the lessee is obliged to take out comprehensive insurance. Although this is recommended for all new cars, it results in a loss of flexibility for the lessee.
Flexibility Once signed, a leasing contract loses its flexibility, which can be problematic if the personal or financial situation of the lease taker changes. It is signed for a predefined period of between 24 and 60 months in most cases. It is possible, but often expensive, to terminate the contract prematurely. As code 178 is written on the vehicle registration document, the car user can only sell the vehicle once the full amount of the lease has been paid off. Also, repairs and services can only be carried out in the manufacturer's official garages.
Hidden costs The monthly leasing payment only covers the loss in value of the vehicle and the interest. The running costs are therefore the same as for a cash purchase. This model, therefore, suffers from the same lack of transparency. In addition, early termination of the contract can result in significant costs.
Mileage The annual mileage is usually fixed in the leasing contract. Additional kilometres are charged at the end of the contract and can be very expensive.
Consumer credit
Advantages
Flexibility As with a cash purchase, the buyer owns the vehicle and can therefore dispose of it freely. It is also possible to repay the loan early. The owner is free to insure the vehicle and to choose the repair shop.
Disadvantages
Acceptance As with leasing, the lessee must prove his or her ability to repay the loan and pay the monthly instalments.
Interest rate In a consumer loan, the asset is not taken as security for repayment. For this reason, the risk of the lending institution is bigger, which results in a higher interest rate.
Hidden charges The actual costs of use are the same as for a cash purchase.
Subscription
Advantages
Flexibility Subscription contracts can be terminated monthly without charge. In addition, the car driver can freely choose his monthly mileage and insurance excesses.
Full service The subscription company takes care of the insurance, tyre storage, registration, etc. Furthermore, it has an extensive network of workshops where the service can be carried out. The motorist does not need to worry about anything.
Transparency The monthly payment covers all costs except fuel or electricity. This makes it easy to budget for expenses. Even if the monthly payments for the car subscription seem high, this is due to the transparency of the model. As mentioned above, the actual costs of using a car are often underestimated or reduced to fuel consumption. The car subscription contains all these hidden costs.
Disadvantages
Available vehicles Subscription companies usually have a predefined fleet of vehicles. The offer is therefore relatively limited.
Monthly payments The monthly payments are higher than for other models. This is partly due to the transparency of the model.
Conclusion
There are several models for financing a vehicle, each with their strengths and weaknesses. A cash purchase is still the traditional model for acquiring a vehicle. However, the percentage of leasing has risen sharply with the fall in interest rates, so that today more than half of all car registrations in Switzerland are financed by a leasing model. Consumer credit represents a smaller share of the market. Finally, the car subscription has only recently appeared, but benefits from current trends and growing interest.
In the end, there is no right or wrong. Every car owner is free to choose the model that best suits their financial situation.
Carequest helps you choose the right model for your needs. Contact us for more information!
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