Should you be extending your leases?

Published in Fleet News October 2010

This remains a hotly-debated topic amongst fleet managers. Leasing companies report that in mid 2008 around 18% of car leases went into extension. This increased to 27% in late 2009 and has since fallen to 21%.

The average lease extension period increased from 6.6 months in mid 2008 to a peak of 8.9 months and has now fallen back to 7.5 months.

Clearly, the peak is now over but many companies are still extending their leases.  So, should you be joining them? That depends.

When deciding whether to extend, consider these factors:

  1. Your company’s recruitment and retention plans. Are you planning the next wave of redundancies and worried you might end up with a number of nearly-new unused cars on the fleet? That would be a really good reason to extend your current leases.
  2. Human factors. Cars aren’t just job-tools, they are part of your motivation and reward packages. If your star salesperson – the man who just loves his cars – gets lured away by a competitor who offers him a brand new all-singing-all-dancing model of his dreams, that decision to extend your leases for another 12 months may just have tipped the balance between him staying or going. People have changed jobs for less.
  3. The extension period. If you extend a lease until a month when the used car market is usually weak, your leasing company will be expecting a low resale price and therefore will increase your rental to compensate for this.  Ask them how much you could save by choosing the optimum end dates. There is a good case to be made for choosing this on a car-by-car basis.
  4. Which cars to extend. There’s no point extending the lease of an unreliable car that has spent long periods off the road. It’s in everyone’s interests to get rid of it as soon as possible.
  5. The extension rental the leasing company has quoted. This may not be the same as the rental you were paying earlier in the lease. If the extension rental is much more – perhaps because the car is due to have a major service four weeks into the extension period – it might be better for you to end the lease on the contractual date and replace it with a new one.
  6. The rental you have been quoted on a new lease. You may well find that this is lower than the rental you are quoted to extend the old lease. Interest rates have fallen and the new car market has become more competitive in the last 3-4 years, so whole life costs for many models have fallen.
  7. Interest rates generally. Do you think they are likely to rise over the next year or so? By how much? If you expect them to rise substantially you might prefer to eschew extensions and take out new leases promptly, to lock into 3-4 year deals that reflect today’s low interest rates.
  8. Green issues. If your company has become more ‘CO2-aware’ you will probably prefer to replace your old car promptly with one with lower emissions and maybe a smaller engine and therefore to enjoy lower running costs, rentals and emissions
  9. Lease accounting. The proposed new accounting standard will require all leases to be shown on companies’ balance sheets (‘capitalised’). If you typically extend your leases by, say, 9 months, you may have to capitalise a larger amount onto your balance sheet. This may be important to some companies. It is a grey area at present but worthwhile flagging as an issue.

Professor Colin Tourick

 

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