You’ve decided that it’s time to get a car. Perhaps to explore this fine country at your leisure? Or probably more likely because you’re losing the will to walk to the S-Bahn station or tram stop when it’s cold, dark and grey in the middle of January! Great, so what now? You’ve probably seen offers for car leasing which seem like a good deal. Not so fast! First of all, you should understand the typical watch-outs to ensure that the deal you’ve seen is not too good to be true. Like pretty much everything, there pros and cons of leasing a car in Germany and knowledge is power.
Is Leasing a Car Financially Sensible?
Leasing in Germany is legally and fiscally considered something in-between financing (hire-purchase, or HP) and rental.
If you buy a car using finance from the dealership selling the vehicle, known as HP or hire-purchase in the UK, then at the end of the fixed period you pay off the residual value and the car is yours.
Leasing in Germany is like a halfway house.
The basics of leasing a car in Germany
Typically a lease contract will involve you paying a (not refundable) deposit (German: Anzahlung) which is actually a down-payment or contribution towards the cost of the car. You then sign a leasing contract – which is typically 36 months in length – and at the end of this period you have 2 options:
You pay off the residual value (German: Restwert) remaining. This is agreed at the beginning of the lease term when you sign the contract. Provided you have not driven excess kilometres vs. your contract terms, this will be a fixed sum as per the amount which is stipulated in your contract. At that point, your contract terminates and you own the car outright.
You hand the keys back to the lease company at the end of the period. Once you have paid off any additional costs due for damages or excess kilometres driven, you are released from your contract. Then you’re free to lease (or buy) another car from whoever you please.
You also must consider the excess / out-of-contract charges which will apply at the end of the lease period. These will be payable for:
Any visible damages to the bodywork or interior of the vehicle. Believe me, they will look for every last scratch and dent to get as much money from you as possible. Some brands have a reputation for being more pedantic on this than others…do your homework and buyer beware!
Any excess kilometres driven over and above the number which is stipulated in the contract. Standard is usually 10,000 or 12,000km per year, so 30,000 or 36,000 over a typical 36 month lease. Bear in mind that this isn’t a huge amount for those of you using a car to commute to work daily plus a couple of holidays a year.
Also note that you can lease a car through a myriad of providers: It doesn’t necessarily have to be through the dealership which is selling the car. It pays to shop around for the best deal.
I want a shiny and new BMW…
Just like with buying a car, the price quoted is for the base model, with no extras. For anyone familiar with this, the extras are the cash cow of the car dealers and the manufacturers. This is where they earn their highest profit. They draw you in with a cheap price for the basic, standard model, and then for all those nice extras you want….cher-ching!
It’s worth considering that most German manufacturers have a policy of very low spec as standard, and everything being considered an extra.
Asian manufacturers – think Hyundai and Kia – by contrast, have very high specifications as standard, so those heated seats, GPS and automatic climate control won’t add thousands of Euro to the advertised purchase price.
The flip side of this is that premium vehicles such as BMW and Mercedes will depreciate much less over the course of a 36 month leasing contract, and as such the monthly rates may be more favourable because the residual value at the end of the contract affects the lease payments.
Or in plain English, you could drive a nice car for a relatively low monthly rate.
Does it make financial sense to lease?
For those who are self-employed and require a car for business use, leasing a car definitely makes financial sense because tax law makes this a relatively easy decision (at least for those considering buying a new car vs. leasing a new car).
Without going into detail (I’m not a tax advisor), the lease payments and business kilometres driven can be considered as deductible expenses against your revenue.
For those who cannot offset their car expenses against revenue generated through a company or self-employment, the case becomes much less of a no-brainer and falls squarely into the “it depends on…” territory. So, let’s take a look at what you should consider here.
Advantages of Leasing (vs. Buying a New Car)
Convenience: The conditions are negotiated up front. You don’t have the hassle of haggling with used car dealers over the part-exchange value when you want to trade in your old car for a newer model.
Affordability: If you’re not cash-rich, it affords you the opportunity to drive a newer / nicer car than you’d probably be able to otherwise afford. You need to pass the credit checks to pay the monthly rate and to be able to (theoretically) afford the residual value at the end of the agreement. That’s a much lower hurdle than being able to finance the value to buy a new car in full.
Leveraging: You don’t need to invest much money up front to drive a new car. If you want, or need, the liquidity of the cash in the bank to spend on other necessities or to invest which otherwise would have been taken up by the purchase of a new car, this enables you to realise this. Let’s not forget that a new car is a depreciating asset, and thus it does not make much financial sense in pure investment terms to buy one outright.
Disadvantages of Leasing (vs. Buying a New Car)
The terms of the contract are often very strict and can land you with hefty excess charges if you don’t adhere to them.
Servicing: The vehicle MUST be serviced by original equipment manufacturer’s (OEM) main dealership network. Especially for premium brands – think Audi, BMW, Mercedes – their prices are horrendous when compared to your regular neighbourhood car mechanic.
Contract (In)Flexibility: If, for any reason you want to cancel the contract before the end of the agreed leasing period – for example – your employer sends you abroad on another assignment, you can’t just cancel and hand the car back. You’re on the hook to pay the outstanding monthly payments until the contract would legally terminate. Unless of course you can find someone else to take on the terms and the contract provider agrees to transfer it.
Insurance Costs: In almost all cases, you will contractually bound to insure the vehicle fully comprehensive (German: Vollkasko) with a low amount as an excess / deductible(German: Selbstbeteiligung). In other words, the most expensive insurance products on the market.
Ownership: You don’t have legal ownership title to the car at any point, unless you decide to pay off the residual value at the end of the lease. At which point, you’re released from the contract anyway.
Leasing versus purchasing a USED car
Looking at this purely from a return on investment perspective, it’s more savvy to ditch the idea of driving a new car, full stop!
Look instead at driving a car which is young enough to still be reliable and not suffer mechanical defects, but old enough to have already suffered the steepest part of its depreciation curve. Most financial commentators would agree on the sweet spot being a vehicle which does not have high mileage and is around 2-3 years old.