Understanding Car Leasing: Requirements and How It Works
As the need for mobility increases, having a private vehicle often becomes the main choice. However, not everyone has the financial ability to buy a car directly. This is what makes car leasing an attractive solution.
For those of you who often change cars, you must already be familiar with the concept of leasing. Primarily, car leasing companies provide credit financing facilities to people who want to buy a new car or rent a used car. However, many people still mistakenly define leasing as a form of credit.
So, what is the difference between car leasing and car credit? Check out the definition, requirements, how it works, and weaknesses and strengths.
What is Car Leasing?
According to the Financial Services Authority (OJK), leasing is a financing activity that includes the provision of capital goods through leasing, either in the form of a finance lease (with option rights) or an operating lease (without option rights). The rented goods are used by the lessee for a certain period, with periodic payments.
In short, leasing is a form of financing facility for capital goods, including vehicles. By providing financing services, car leasing as a company will provide funding for those of you who want to rent a new or used car. You can have the car you want, but you have to pay it off in installments. Generally, leasing payment methods involve a term of 12–36 months.
People often equate car leasing with car loans, even though they both offer different services. Car leasing is a financing company that rents out a car for a certain period of time, and the car can be repossessed if you cannot pay.
On the other hand, car loans involve purchasing a car by applying for a loan from a bank or multi-finance company. Once approved, you have ownership of the car. So, even though they are similar, the main difference between leasing and credit is the right to own the car after the payment process is complete.
Terms and Conditions for Buying a Car via Leasing
The process of applying for used or new car leasing can be completed relatively quickly. You only need to visit the leasing service provider's office. Later, you will be given an explanation regarding the proposed car leasing, along with the following conditions:
- The minimum age is 21 years old or married.
- Parent's KTP if the applicant is single.
- Personal and partner ID cards if married.
- Family card.
- Marriage certificate.
- Proof of residence (Electricity Account, Telephone Bill, PAM, AJB, PBB).
- Proof or business certificate for entrepreneurs or professionals.
- Deed of company establishment, SIUP.
- Salary slip for the last three months.
- Account movements for the last three months.
- The maximum age limit when the credit is paid off is 55 years.
After fulfilling all the requirements, you can rent the car for leasing, and then an assessment of the feasibility of the conditions above will be carried out. Please note that the requirements may vary depending on the leasing company.
Car Leasing Simulation
In addition to the terms set by the lease, you need to evaluate your repayment capabilities. This is very crucial because it can have a significant impact on your overall financial condition. Make sure you have the ability to pay until the end of the credit period, so as to avoid late payments or even confiscation of the car you are crediting.
As a precaution, you can carry out a credit simulation. The following is an example of a used car leasing simulation:
- Used car price: IDR 100 million
- The down payment or DP is usually between 20% to 30% of the car price. For this simulation we use 25%
- Interest rate: 8% per year
- Credit term: 3 years
- Down payment: IDR 100 million x 25% = IDR 25 million
- Loan value: IDR 100 million – IDR 25 million = IDR 75 million
- Interest expense for 3 years: 8% x 3 (years) x IDR 75,000,000,- = IDR 18,000,000
- Total debt plus interest: IDR 75 million + IDR 18 million = IDR 93 million
- Total installments per month: IDR 93,000,000 / 36 (months) = IDR 2,583,000
Total First Installment to be Paid:
- Down payment: IDR 25 million
- First-month installment: IDR 2,583,000
- Insurance costs (assuming 1.8% per year): 1.8% x 3 (years) x IDR 75 million = IDR 4,050,000
- Administration fee: IDR 850,000 (may vary depending on the leasing company).
- Total down payment: IDR 32,483,000
The amount of credit provided by the leasing company is determined based on the down payment, the amount of credit, and your monthly installment tenor want. This amount is influenced by how large the down payment is. The larger the down payment, the smaller the monthly installments, and vice versa. Apart from that, the choice of credit term for paying off the loan will also affect the size of the monthly installments.
How is the Process of Car Leasing?
The way car leasing works involves the credit assessment process, selecting a new car, or leasing car, and paying installments according to the contractual agreement. For more details, see how car leasing works below:
- Leasing companies (creditors) provide financing guarantees to debtors who meet the car loan requirements. The credit application must be accompanied by the required documents, as requested by the leasing company.
- Leasing assesses the debtor's credit application. The assessment generally includes the debtor's financial capabilities, credit history, and the condition of the car to be purchased.
- Leasing provides decisions on debtor credit applications. If the credit application is approved, the leasing company will issue a credit agreement.
- After obtaining approval from the leasing company, the debtor has the freedom to choose between buying a new or used car according to his preferences.
- The debtor pays a down payment (DP) for the car. The down payment usually ranges from 20% to 30% of the car price.
- After purchasing a car by leasing, the debtor has an obligation to pay installments and interest in accordance with the agreement stated in the credit contract.
- Leasing companies, as providers of financing services, prepare installment schemes that match the tenor, providing flexibility to debtors in their payments.
- The amount of credit provided by the leasing company is determined by the amount of down payment provided. And also by the debtor and the desired monthly installment tenor.
- In principle, the larger the down payment given by the debtor, the more affordable the monthly installments will be. Meanwhile, the smaller the down payment, the higher the monthly installments.
- The down payment usually includes a number of elements, including interest, principal payments, administration fees, and vehicle insurance premiums.
- In situations where the debtor has difficulty paying off the installments or there is bad credit, the leasing company has the right, in accordance with applicable legal provisions, to confiscate the car that has been financed.
Advantages and Disadvantages of Car Leasing
There are several things to consider before buying a vehicle to lease. Check out the advantages and disadvantages of car leasing below:
Advantages of Leasing:
- Leasing offers a fast and easy car loan application process.
- Leasing has fewer requirements compared to applying for a vehicle loan at a bank. This reduces the burden of requirements and lengthy processes.
- The leasing staff is ready to help during the entire credit process, including document processing and pick-up facilities. This makes it easier for you without having to bother going to the dealer.
Disadvantages of Leasing:
- Even though the process is fast, the costs incurred can be greater. This involves fiduciary fees, insurance, and provision fees that you, as the renter, must fulfill.
- Leasing requires insurance costs to protect the vehicle from the risk of loss or damage. Of course, this can increase the total costs that must be incurred.
- The down payment, or DP, required by leasing tends to be greater than the regulations set by Bank Indonesia. This may require the renter to put up more money up front.
When applying for car leasing, as with other credit applications, it is very important to be careful and wise in choosing a leasing service for your car purchase. Be sure to conduct an in-depth evaluation of the contract terms, conditions, and interest rates offered by the leasing company. The right decision in choosing leasing services will help avoid potential losses in the future.