It can be difficult for fleets to determine whether to lease or buy their fleet vehicles, but it’s a decision all fleet managers must make. The instinct of many fleet managers is to jump into outright purchasing brand new fleet vehicles. These new vehicles tend to be more fuel-efficient options. Fleet managers could also purchase hybrid or electric vehicles to save even more money on fuel. New vehicles are also safer since they include newer safety features. Fleet managers also avoid the restrictions on wear, tear, and mileage by purchasing rather than leasing. Despite this, there are a lot of reasons teams choose a fleet vehicle lease over purchasing new vehicles every 3-4 years. We’ll cover those reasons, and more, below.
What is a Fleet Vehicle Lease?
A fleet lease is very similar to financing a vehicle, except there are terms between the lessor and the lessee. This usually includes a set number of months or years that the lessee can use the vehicle(s), as well as a 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.
There are a couple of different types of leases available for fleets including an open-end lease and a closed-end lease.
Fleets with temporary vehicle needs are more prone to choosing this type of lease. The lease typically ends after just one year, but because it’s open-ended, the lease may continue for months after. This means there is no long-term contract, which is a major benefit for fleets that don’t know their vehicle needs, want to test different vehicles, or that don’t need vehicles continuously.
There are some drawbacks to this type of lease, such as a terminal rental adjustment clause (TRAC). This is common in many open-end fleet vehicle leases and forces the lessee to ensure the defined resale value of the vehicle. If the lessee can’t live up to this, it may mean an additional fine. Vehicle maintenance is also not included in this lease—meaning it’s up to the lessee to ensure the vehicle remains in good condition.
This is a popular choice for fleets that need fleet vehicles on an on-going basis or that have plans for growth in the future. It’s also great for those fleets that are just starting out and 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 largest drawbacks of leasing a vehicle is that you’re not actually paying for the vehicle. You’re essentially renting the vehicle, which means you have to maintain it to certain standards. This can be difficult for many fleets since drivers commonly use their vehicles all day, every week. 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. This helps fleets avoid safety risks and reduced efficiency. Leasing a corporate fleet vehicle can also help teams avoid the major purchase and repair costs.
Besides the costs of replacing vehicles at the end of the life cycle, there are other considerations:
- Vehicle lifecycle management
- Administration costs
- Repair costs
- Loss of tax benefits by leasing
- Long-term costs
- CSA scores
- Insurance scores
Benefits of Leasing a Vehicle
There are a lot of benefits of leasing new or used fleet vehicles, just as there are with purchasing vehicles. The benefits of leasing may outweigh ownership for fleets, considering it’s the more popular choice for fleets of all sizes. Here are some of the benefits you should be aware of:
Fleets enjoy the relief of several tax benefits, such as mileage and fuel deductions. But fleets can also take advantage of other vehicle-related expenses, such as repairs and leasing costs. Of course, the company must prove they’ve used this vehicle for business at least 50% of the time, but it’s a major advantage regardless.
Vehicle loans are expensive, but leases tend to be more affordable. If you’re just starting your fleet business, a lease is a good way to save money until you increase your capital. For more established fleets leasing is a good option for staying on budget.
When you purchase a vehicle, you’re locked into that vehicle for at least four years. Most fleets will keep the vehicles even longer because they have too much negative equity to upgrade sooner. This means that you’re not reaping the benefits of an upgraded fleet. You will not get greater fuel efficiency or safety features as quickly. However, with a lease, you can simply switch to a newer model.
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 for fleets that use their vehicles often, this isn’t ideal. You want your vehicles to run at maximum efficiency. But after 3-4 years on the road, these vehicles begin to lose their efficiency and could need more vehicle maintenance. Leasing a vehicle takes care of this issue by cycling out your old vehicles with new ones.
There are plenty of benefits to buying a fleet vehicle, but the benefits of leasing often outweigh ownership. For fleets that use their vehicles throughout the week, experience high wear and tear, and shorter vehicle lifecycles, leasing may be the right choice. Learn more about leasing fleet vehicles and how telematics can help your fleet save even more money, visit Azuga.