What is the difference between leasing and renting?

The difference between leasing and renting can bring competitive advantages to companies, so it is worth understanding each of these models.

The difference between leasing and renting can be critical for the economic model of an SME or a self-employed person. Renting and leasing are different models for using a car, as are buying, carsharing or using a cab. Each mode has its pros and cons, which must always be analyzed from the perspective of the company’s needs. What is the difference between leasing and renting, and which one is better for me?

What is renting?

Renting is a very common leasing system for vehicle rental. Although there are many types of renting, they are generally measured in monthly terms and long contracts, and usually include services such as insurance payments, taxes, servicing, maintenance, breakdowns, tire changes, etc. They do not include fuel, and obviously do not include fines.

Advantages of renting

The advantages of renting over buying are the monthly planning of expenses, and being able to terminate the contract when the vehicle is no longer useful. As a result, companies frequently opt for this type of service, which also offers a replacement vehicle service. The fact it is ‘hassle-free’ is one of the most appealing advantages, together with relegating maintenance.

In Spain, 50% of the VAT on renting is tax deductible in the case of self-employed workers, unless reliable proof is provided that it is used only for work, in which case it rises to 100% VAT, like companies. With respect to personal income tax, it will also be necessary to have an exclusive occupational use in order to deduct 100% of the tax liability, and partial deduction will not be possible.

In conclusion, the main advantages of renting are as follows:

• Monthly planning of expenses.
• The possibility to terminate the contract at any time.
• Vehicle replacement service.
• The ease of relegating maintenance.
• VAT relief from 50% in the case of self-employed workers.

What is leasing?

Leasing is a system that gives the lessee the option to purchase. Generally, it is a formula that is also applied to vehicles, and again it is interesting for companies and self-employed workers.

Leasing can be simplified as renting plus purchase, or rent to own.

Advantages of leasing

One of the major advantages of leasing over purchasing is that the vehicle is acquired at a residual price at the end of the lease period due to the drastic loss of value (accounting depreciation) that vehicles undergo during the first months of use.

On the other hand, not all leasing is not tax deductible, as is the case with leasing itself. It is possible to deduct part of the monthly payment. However, since it is also the acquisition of a business asset, it must ultimately be accounted for among the business assets. This is something to consider in the calculations.

In conclusion, the main advantages of leasing are as follows:

• The acquisition of the vehicle at the end of the rental period.
• In the case of companies, the acquisition of vehicles through leasing is recorded as an expense and not as a debt.
• The possibility of constantly changing cars during the leasing contract.

What is the difference between leasing and renting?

The main difference between leasing and renting is that leasing is a form of financing that allows an asset to be rented with the option to buy it once the rental contract has ended, while renting is ‘only’ a leasing system and the holder cannot own the vehicle when the agreement ends.

While in renting you are the lessee of an asset, in the leasing model you are the lessee to finally own the car. This is why renting is usually somewhat more affordable than leasing, and a better option if you do not wish to purchase the vehicle after the lease. On the other hand, the slightly higher price of leasing compensates after purchase.

It is common for SMEs of a certain size to use leasing because they expect to use a similar number of vehicles in the future. However, it is also increasingly normal to see some volume in leasing and some in renting, now that both modes are competing in parallel. This mixed approach to transportation allows them, firstly, to have a certain accounting stability and, secondly, to be very flexible when it comes to increasing or reducing their fleet.

Different modes, adapted to every need

Not all companies have the same mobility needs, which is why there are many options on the market when it comes to accessing these and other vehicles. For example, for sporadic use by people who do not have a driver’s license, or who do have one but have nowhere to leave a vehicle once at their destination or do not want to park it, using the public cab service is an option.

A similar option, but not available outside major cities, is carsharing. It is inexpensive compared to purchasing a car although the downside is you have to park it at the destination. In addition, there is not much supply in low population density environments.

There is a much wider range of monthly car rentals, although it is somewhat more expensive because you also pay for all that time when the car is not used (more or less 95% of the time). However, it has advantages such as the convenience of using it, as long as you have a place to leave it. Both renting and leasing would fall into this category.

Finally, the most common model continues to be purchasing a private vehicle, for which BBVA has prepared a financing calculator. This trend is unlikely to continue in medium-sized cities due to low occupancy and the environmental problems it generates. VAO lanes, for example, give preference to high-occupancy vehicles, and there are more and more ZBE or car-free zones.

All these modes of car use can be used, in turn, by means of car sharing mechanics. For example, carpooling is a cooperative vehicle sharing system that leverages shared trips to avoid economic and environmental costs. It is very common, and recommended, to share a car when going on vacation or commuting to work.