9 key things to know before taking out a leasing contract
One in every two people in Switzerland finance the purchase of their vehicle with a leasing contract, rather than by buying it cash or with a small loan.
We explain the key points of leasing, its advantages and disadvantages compared to other financing methods, as well as tips to make the right choice and avoid pitfalls.
1. Who owns the vehicle
The leasing contract brings together 3 entities:
- The driver
- The financial establishment
- The dealer
The fact that the person who takes out the leasing contract features on the vehicle registration certificate does not mean that they own the vehicle. The driver is a lessee with a right of use.
The true owner of the vehicle is the financial establishment to which the vehicle was sold by the dealer. However, if any defects are found, your claims should be addressed to the dealer. You are protected by the manufacturer’s warranty until the end of the contract.
With a car loan on the other hand, you are the immediate owner and have the right to sell the vehicle at any time.
2. Types of contracts
There are 3 types of leasing contracts:
(a) Pure contract leasing
The rent is calculated according to the term of the lease from 1 to 6 years and the agreed mileage. At the end of the rental period, the vehicle is returned to the dealer. The monthly payments are lower.
(b) Contract leasing with a purchase option
At the end of the contract, you have 2 options: either buy the car by paying a residual value defined when the contract was concluded, or replace it with a new vehicle and start another leasing contract. The residual value must be indicated, as this is the only way of checking whether the interest matches what is stated in the contract.
You want to become the owner of the vehicle? The higher the residual value, the better for you. If the balance amounts to several thousand francs and you have not been able to save this amount, you can take out a private loan at that time.
(c) Lease purchase
You are immediately the owner of the car at the end of the leasing contract, there is no residual value. Monthly payments are necessarily higher.
- Fully comprehensive insurance until the end of the leasing contract. With a private loan, you are free to insure yourself as you wish, in particular by choosing the third party fire and theft insurance (but with a new vehicle, it is nevertheless advisable to take out a fully comprehensive insurance policy for the first few years).
- The servicing plan must be respected and the car must be returned undamaged in the case rentals. If you are to have servicing carried out by a partner officially approved by the manufacturer, the costs are very likely to be higher.
- The maximum annual mileage to be respected. If excess mileage is found, you will have to pay between 7 and 44 cents per kilometre for the excess kilometres. Assuming that you have exceeded the agreed limit at the end of the contract by 10,000 km, at 25 ct per kilometre you will be charged 2,500 CHF! So, take the time to correctly estimate the distances you will be travelling.
- Zero tax deduction with a leasing contract because it is not considered as a private debt, but as a rent. With consumer loan, the interest will be tax deductible.
4. Interest rates
An interest rate of less than 2% is generally considered advantageous. They average is between 4% and 5%.
Beware of 0% rates that could lead to believe that it would be as advantageous as a cash purchase. Leasing is very often calculated on the list price, whereas dealers usually sell cars with a discount of between 6% and 12%. These 0% offers are sometimes more restrictive on the annual mileage and the rental period.
If the interest rates for a leasing contract are lower than those of private loan, it is because the financial establishment has the guarantee to recover the vehicle in case of disputes related to the monthly payments.
Security deposits of several thousand francs are increasingly required by financial establishments. It is advisable to transfer the deposit to a blocked account as you would for the security deposit for a rental property.
6. Right of withdrawal
For leasing contracts, you have the option to terminate the contract within 14 days pursuant to Article 16 of the LCC. The same applies to consumer loans.
To benefit from this right, make sure that it is not marked « sales contract » but « leasing contract ».
7. Early termination
You have lost your job, you are in financial difficulties or for any other reason you are forced to terminate the contract early. The financial establishment will be entitled to charge you a fee which may be relatively expensive. The LCC does not set out a specific rule in this regard and does not indicate which numbers are authorised. Each leasing company can therefore calculate these costs as it sees fit, leaving the door open to abuse. In some cases, these costs can amount to several thousand francs. The purpose of these indemnities is to compensate for the risk of loss of value of the vehicle, especially as it loses more value in the first few months. The recalculation coefficient is noted in the contract.
If you consider these indemnities abusive, you are entitled to object to them. Seek the advice of a legal adviser, or contact the Federation of Consumers for French-speaking Switzerland. They are usually willing to negotiate them, but not always.
8. Non-payment of monthly payments
Late payments are registered at the Zek.
It is only after 3 monthly instalments in arrears that the leasing company can terminate the contract and demand the return of the vehicle.
Please note that the financial establishment will also have the right to charge you early termination fees.
9. Compare several offers
Take the time to think carefully about the type of contract you want to make sure it is the best option for you.
A well understood and smooth leasing can be interesting, hence the need to compare several offers.
Also read the general terms and conditions of the contract carefully.
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