August 6, 2020
New vehicles: Financing, leasing, or renting — what’s the best option?
Those who wish to make their dream of having a new car come true don’t necessarily have to bust their wallet. That’s because one’s dream car can be paid off with a customized installment plan, leased for a specific period of time, or even rented on a short-term basis. The question is which of these options is the best one for you. Our guide will help you find the solution that meets your needs!
How does financing work?
When you finance a vehicle, you obtain a loan from an automotive (captive) bank or another bank or credit institution. You then pay off the loan in monthly installments. Interest is also charged on the loan, whereby the interest amounts are incorporated into the installments from the start. When you finance a vehicle, you own it but it also serves as collateral for the bank throughout the financing period. In other words, the bank holds the vehicle title, which is then returned to you after the loan has been paid off. From that point on, you are the legal owner of the vehicle.
Who should consider a financing option?
Vehicle financing makes sense if you wish to purchase a vehicle but do not have enough money to pay for it all at once. One key argument in favor of financing involves the fact that the installments you pay not only give you the right to use the vehicle but also represent a claim of ownership. This means you can let friends or family members use the vehicle as well.
Important note: You need to meet various requirements if you want to finance a vehicle in Germany. For example, you must be at least 18 years old, maintain a permanent residence in Germany, and have a good credit rating.
Which things should you always keep in mind when financing?
Business owners should consider the fact that unlike the case with leasing, only the interest portion of their financing installments is tax deductible when they finance a vehicle used for business purposes. The value of the vehicle itself is written off over a certain period of time. If you finance a vehicle and your circumstances change, you can only return the car at the end of the term of your agreement if you have chosen a Plus3 financing package. With Plus3 financing, you decide at the end of the financing period if you want to pay the final installment and assume complete ownership, or if you instead wish to take out follow-up financing to pay the final installment in order to keep the vehicle.
What is the effective annual interest rate?
When you’re looking to obtain a loan at favorable terms, you’ll generally be quoted the so-called nominal interest rate, which is the rate charged for the loan itself. However, other costs and fees also come into play when a loan agreement is concluded, and the figure for the effective annual interest rate takes these costs and fees into account. In other words, the effective interest rate is a percentage calculation based on the nominal interest rate and all other costs and fees associated with the loan. The term of the loan and the repayment schedule also play a role here. The process for calculating the effective interest rate is very complex, which is why banks are required to calculate it themselves and disclose it to their customers. However, numerous tools for calculating effective annual interest are also available on the Internet for anyone to use. When shopping for a loan, you therefore definitely need to take into account the fact that loans issued at the same nominal interest rate by two different banks can end up having two different effective interest rates.
Why might a bank not approve my loan?
There are several different reasons why a bank might reject your loan application. For example, it’s possible that your income is too low, your credit check came out negative, or you’re already paying off several loans at the moment. In this case, you can offer more security by having someone guarantee your loan in the form of a surety, or you can offer to increase your advance payment.
What can I do if I am no longer able to pay my loan installments?
Job loss, divorce, and other unforeseeable events can lead to financial difficulties. Several courses of action can be taken if you are no longer able to pay off active loans or meet other financial obligations. For example, you can request a loan deferment, refinance the loan with your principal bank or another bank or, in the worst case, declare bankruptcy.
What is leasing?
When you lease a vehicle, you acquire the right to use it by signing an agreement with the leasing provider. As is the case with financing, you are responsible for insuring the vehicle, maintaining and repairing it, and paying the applicable vehicle tax. However, some leasing agreements also include insurance, maintenance, repairs, and tires in the package. Unlike the case with a financed vehicle, you may not sell a leased vehicle. You also may not allow third parties to use it, although this depends on the specific terms of the agreement. Leasing agreements generally run for at least one year, with a maximum term of five years. After the term is up, you have to return the vehicle — but you can also lease a new model with a new agreement. When you lease a vehicle, you make a monthly payment to cover the loss of value that results from its use. This monthly leasing payment is calculated on the basis of several factors — the actual purchase price of the vehicle, the duration of the leasing agreement, the maximum mileage figure agreed upon, the projected residual value of the vehicle at the end of the agreement period, and any special features included, such as a service agreement or insurance packages. It should be pointed out that you can reduce your monthly leasing rate if you make a one-time payment when you conclude the leasing agreement.
You should also be aware of the fact that while traditional leasing almost always involves new vehicles, it is also possible to lease a used car. The principle here is the same: You can use the vehicle in exchange for a monthly payment, but the vehicle remains the property of the leasing company or dealership. The only difference involves the amount of the monthly payment, which is lower than that for a new vehicle because of the lower loss of value in the case of a used car. Used-car leasing is therefore a good option for freelancers, self-employed individuals, and small business owners who also don’t attach much importance to always having to drive the latest models. However, the drawback here is that leasing a used car might lead to higher costs for repairs and maintenance. Depending on the manufacturer and brand in question, it may be possible to obtain a warranty extension on a used vehicle.
What is “mileage leasing?”
There are different kinds of leasing agreements, whereby the specific form a leasing agreement takes has an effect on the amount of the monthly payment and possible follow-up payments after the leasing agreement expires. The most common type of agreement involves so-called mileage leasing. In this setup in Germany, you define the maximum number of kilometers (“mileage”) that you plan to drive with the leased vehicle. The lower the mileage, the lower will be the monthly payment. Moreover, if you return the vehicle after having driven less than the agreed maximum number of kilometers, you will be reimbursed for a portion of the monthly payments you made. Conversely, you will have to make follow-up payments if you exceed the kilometer limit. The advantage of mileage leasing as opposed to so-called residual-value leasing is that you as the customer enjoy greater security when the leasing term is up — i.e. there are no unpleasant surprises if the residual value of the vehicle should turn out to be lower than the projected figure.
Important note: Try to estimate the kilometer limit as realistically as possible. Many leasing providers will allow you to exceed the limit — usually by 1,500 to 2,500 kilometers. However, charges for each additional kilometer will be high once you go over that limit.
What is “residual-value leasing?”
With “residual-value leasing,” the leasing provider calculates the projected loss of value of the vehicle during the leasing period. This calculation in turn yields a figure for the vehicle’s estimated residual value when the agreement expires. The difference between the purchasing price and residual value is then used to calculate the amount of the monthly payment.
Important note: After the leasing term is up, the leasing company or dealership will determine the actual residual value of the vehicle. Changed market conditions, as well as accidents or signs of wear, can cause this value to deviate from the original residual-value estimate. If the residual value is lower than the figure in the leasing agreement, you will have to pay the difference.
Who should consider a leasing option?
Leasing is a good option for commercial customers who can deduct their monthly leasing payments as a business expense. Private individuals can benefit from leasing in that they don’t need to make a long-term financial commitment, as is the case with financing. Leasing makes it possible for you to use a new vehicle at what are usually better terms than what you can expect with a financing (loan) agreement — provided no additional costs accrue with regard to loss of value or exceeding the kilometer limit. When you lease, you can also always drive the latest models. The flexibility you enjoy due to a relatively short contractual period is also a decisive argument in favor of leasing. In addition, leasing offers you the opportunity to try out new technologies, such as electric drive systems, over a substantial period of time under real-life conditions. You also have the option of switching to a new electric model after your term is up, which can be particularly beneficial if electric drive systems become even better and more efficient.
Which things should you always keep in mind when leasing?
Pay attention to the kilometer limit
If you don’t pay attention to the kilometer limit, you’re likely to have to pay extra when your leasing term is up. Vehicle care and maintenance are also extremely important when you lease a car. With mileage leasing, the lessee has to pay at the end of the leasing period for problems with the car that go beyond normal wear; in the case of residual-value leasing, any problems with the car will increase the vehicle’s loss of value. The amount of compensation to be paid by the lessee for a vehicle value lower than the original estimate is determined by a specialist after the leasing term expires. Leasing agreements usually run for between two and four years, and in general the agreement cannot be terminated before the leasing period expires.
Pay attention to total costs
If the proposed installments seem suspiciously low to you, you will need to examine the exact structure of the costs involved. Total costs consist of the sum of all monthly leasing payments plus a one-time payment. If the monthly payments are enticingly low, the one-time payment will often be horrendously high.
Pay attention to the leasing period
Your leasing period can be crucial. This period is generally defined in the agreement, whereby the possibility of early termination is excluded. If your circumstances change, a long leasing period can become a problem. If you want to play it safe, you should therefore aim for a short leasing period that you’re sure you can manage — or else you should try to get a special right of termination incorporated into your agreement.
The mileage you put on the vehicle will affect how much you pay
If you are able to estimate how many kilometers you will travel with your leased car, you should make sure this figure is incorporated into the agreement as maximum mileage. This ensures that your estimated total mileage, and the charges for exceeding it (or reimbursement for falling below it), will be specifically defined in your agreement. That way you won’t have any unpleasant surprises when you return the vehicle. You can also opt for residual-value leasing, of course, in which case a calculation will be made regarding the projected value of the vehicle when the leasing period expires. If excessive use of the vehicle results in a value lower than the projected value, you will have to pay the difference. In other words, in this setup you assume the entire risk associated with the resale of the vehicle.
Service leasing as an all-round carefree package
As is the case with any vehicle, the use of a leased vehicle requires certain services to be performed — and leasing companies and dealerships generally provide these services for an additional fee. Such services include maintenance, wear-and-tear repairs, tire care and replacement, and vehicle insurance. Lessees who take advantage of these services by obtaining service leasing packages enjoy all-round carefree use of their leased vehicle. Such customers pay a fixed monthly service fee and don’t have to worry about any other costs popping up during the leasing period.
Insurance you must have
Liability insurance is mandatory in Germany. If you lease a vehicle, it would also be advisable to obtain comprehensive insurance. If you don’t, and your dream car gets totaled, you’re going to have to dig deep into your pockets. Keep in mind that comprehensive insurance does not cover installment payment defaults. For such coverage, you need to obtain lease payment default insurance, which helps lessees continue to pay the leasing provider if the leased vehicle can no longer be used due to an accident caused by another party, or by the lessee. Customers whose leasing providers grant them a special right of termination in the event that their leased vehicle is totaled or stolen have even less to worry about. In this case, the customer’s insurance covers the current value of the vehicle, and GAP insurance is used to cover any difference between the leasing redemption value and the compensation for damages (time value). In many cases, GAP insurance is included in leasing agreements at no extra cost.
Can I lease a car if I’m a student?
Many students cannot afford high advance payments, or high balloon payments at the end of a financing period, which is why leasing offers a good alternative to purchasing a car. However, most students will be asked to offer some type of security. Banks need to be able to garnish wages or salaries in the event of default, but under German law the money students get from Germany’s national grant and loan agency, from their parents, or from the child benefit system may not be garnished. That’s why students’ parents often provide a guarantee or else simply conclude the leasing agreement themselves. Other possibilities include having a guarantor with sufficient income provide a guarantee, or getting another person to co-sign the leasing agreement. Da Studenten meist keine hohen Anzahlungen oder Schlussraten zahlen können, ist das Autoleasing eine gute Alternative zum Kauf eines Pkw. In den meisten Fällen wird aber eine finanzielle Sicherheit verlangt. So benötigt die Bank ein pfändbares Einkommen, zu diesem zählen weder Kindergeld, BAföG noch Unterhalt. Deshalb bürgen bei Studenten oftmals die Eltern oder diese schließen den Vertrag direkt selbst ab. Weitere Möglichkeiten sind, einen Bürgen mit ausreichend Einkommen anzugeben oder einen zweiten Kreditnehmer in den Vertrag aufzunehmen.
If I lease an electric vehicle, can I benefit from the German government’s environmental bonus payment?
The so-called environmental bonus, which was introduced by the German federal government in cooperation with automakers, is meant to offer a financial incentive to encourage drivers to switch to electric vehicles. The environmental bonus applies to the purchase or financing of an eligible vehicle — and to its leasing as well. Since February 2020, the environmental bonus has totaled up to €6,000 for all-electric vehicles and up to €4,500 for plug-in hybrids. Half of the bonus is paid by the federal government (Federal Office for Economic Affairs and Export Control — BAFA), while the other half is issued by the manufacturers. Within the framework of the German coronavirus assistance program, the federal payment was doubled to €6,000 as part of an “innovation bonus” initiative, while the amount paid by the manufacturers has remained the same. This means that the total bonus for the period July 2020 to December 2021 now amounts to up to €9,000 for all-electric vehicles and up to €6,750 for plug-in hybrids. The leasing plans for vehicles that meet the environmental bonus requirements automatically incorporate the manufacturer’s share of the bonus into the leasing package. With regard to the BAFA portion of the bonus, customers can pay that amount up front as a one-time payment, which will also reduce their monthly leasing rate. After they take delivery of the vehicle, they can recover this one-time payment by requesting a bonus payout from BAFA. The highest possible bonus amount is only paid for electric vehicles with a net list price of €40,000 or less. Starting at a net list price above €40,000, the bonus decreases to a total of €7,500 for all-electric vehicles and €5,625 for plug-in hybrids. Plug-in hybrids are also subject to a further restriction in that their CO2 emissions have to be lower than 50 grams per kilometer. It’s important that you check beforehand to see if the vehicle you’re interested in is included on the list of electric vehicles eligible for the BAFA environmental bonus.
Which service and repair center do I need to take my leased vehicle to?
In general, you should have your leased vehicle serviced and repaired at a specialist service and repair center. Leasing agreements often include the name of a specific service and repair center approved by the manufacturer.Für Ihr Leasing-Fahrzeug müssen Sie in der Regel eine entsprechende Fachwerkstatt wählen. Häufig ist in Leasingverträgen ein vom Hersteller anerkannter Betrieb genannt, bei denen Sie Reparaturen vornehmen können.
Can I lease a vehicle without making an advance payment?
An advance payment will reduce the monthly rate you have to pay. The higher the advance payment, the lower the rate. It is in fact possible to lease a car without making an advance payment — but once again, the amount of the missing advance payment will be calculated into your monthly leasing rate. The advantage of leasing without an advance payment is that you don’t need to spend any money up front.
Can I lease a used car?
Traditional leasing almost always involves new vehicles. Nevertheless, used-car leasing is possible and can be a good alternative for private individuals, business owners, and even companies. Used-car leasing works exactly the same way as new-car leasing: You can use the vehicle in exchange for a monthly payment, but the vehicle remains the property of the leasing company or dealership. The only difference involves the amount of the monthly payment, which is lower than that for a new vehicle because of the lower loss of value in the case of a used car. Used-car leasing is therefore a good option not only for small business owners but also for freelancers and self-employed individuals who also don’t attach much importance to always having to drive the latest models. However, the drawback here is that leasing an older car might lead to higher costs for repairs and maintenance.
A alternative to financing or leasing
Celebrating a wedding, moving house, or going on vacation? In some cases, renting a vehicle is a good alternative to financing or leasing a car. You can rent a vehicle for one day or several weeks. When you rent, you maintain a complete overview of your costs, which basically consist of a fixed rate that also includes vehicle tax, inspections, and liability and comprehensive insurance. The only thing you need to worry about are fuel costs. In general, your financial risk as a customer is significantly lower than if you lease a car, for example. Renting also offers another major advantage: It keeps you flexible because the short period of use involved means you don’t need to do any long-term financial planning. Should your requirements change, you can simply switch vehicles without any hassles, after which your rental rate will be adjusted accordingly.
What does long-term vehicle rental mean?
Long-term rental refers to a vehicle rental for a period longer than one month. Companies in particular use long-term rentals to manage temporary vehicle shortages or provide employees with vehicles while a project is running, for example. Commercial customers can deduct the rental costs from their business income because rental payments, like leasing payments, are treated as a direct business expense in German tax law. When you rent a vehicle for an extended period of time, you don’t have to make an advance payment, nor do you need to worry about residual value, as is often the case when you lease a car. Renters simply pay the rental fee while the car rental company handles the rest in an “all-inclusive package” for drivers.
What is a “car subscription?”
A so-called car subscription is a special type of all-inclusive long-term vehicle rental package. The car subscription is used by commercial and private customers who want to remain flexible in terms of the period of time they use their vehicle. The rental period is usually between six and 24 months. Usually, there is the possibility to terminate the contract before the end of the period of use agreed upon at the beginning. Like a long-term rental, a car subscription is an all-inclusive package — i.e. you don’t need to worry about things like car delivery, maintenance, and repair costs, or insurance and vehicle tax. The subscription flat rate generally covers all such costs. You should keep in mind, however, that some companies which offer vehicle-subscription flat rates also have minimum-age requirements or annual mileage limits.
Financing, leasing, and renting with Mercedes-Benz Bank: Our products and services:
The Standard Financing package allows you to decide how much of an advance payment you wish to make and thus how high your monthly rate will be. A fixed interest rate and fixed monthly payments make financing your vehicle a transparent and predictable process — and there are no balloon payments or mileage limits.
With Plus3 financing, you decide at the end of the financing period if you want to pay the final installment (balloon payment) and assume complete ownership of the vehicle. Alternatively, you can take out follow-up financing to pay the final installment and keep the vehicle, or you can return the vehicle to your dealership at the contractually guaranteed residual value. You can also sell your Mercedes at the end of the financing period and use the money to make the balloon payment and an advance payment on a new Mercedes. With this type of financing, you benefit from relatively low monthly payments because the high final installment, or balloon payment, means your monthly rate is lower than the rate in a Standard Financing package.
The Balloon Payment Financing package allows you to benefit from relatively low monthly payments. That’s because the higher final installment, or balloon payment, enables a monthly rate that is lower than the rate in a Standard financing package. You can also decide how much of an advance payment you wish to make, and thus how high your monthly rate will be.
Standard Leasing package: You don’t want an vehicle for an unlimited time but only for a certain period? Leasing offers you this freedom. Reasonable rates give you financial latitude, even as you continue to drive the latest models — which means you always remain up to date in terms of vehicle technology. If you drive more or fewer kilometers than agreed, these will be invoiced transparently and fairly on the basis of the contractually agreed rates.
Service Leasing: With Service Leasing, the monthly payment not only covers wear and tear on your car but also a comprehensive range of services. You can decide for yourself which services you would like to use: “Maintenance and Wear and Tear” and/or “Tire Service and Replacement.” When you take your vehicle to a Mercedes-Benz service and repair center, you simply show us your Service Card and we’ll take care of the rest.
Private Leasing plus: With Private Leasing plus, you pay a monthly leasing rate that includes liability and comprehensive insurance coverage. Whether it’s an electric vehicle or a car with a conventional combustion engine — your insurance package is perfectly tailored to your vehicle. Your monthly rate never changes, even if you have an accident. You can decide on this rate for yourself by adjusting the leasing period and mileage limit in line with your needs. If your car needs to be repaired, you can be sure that this will be done at an authorized Mercedes-Benz service and repair center.
Business Leasing plus: As a commercial customer, you can benefit from our Business Leasing plus package that offers you low rates that also include liability and comprehensive insurance. The best part about the insurance component in Business Leasing plus is that your rate stays the same no matter how many drivers use the vehicle. The premium itself is calculated mainly on the basis of your no-claims discount in the German car insurance system.
You can rent a Mercedes-Benz vehicle via Mercedes-Benz Rent at all Mercedes-Benz dealerships and at selected authorized partners throughout Germany. Whereas a normal rental agency usually offers you similar cars from different categories, Mercedes-Benz Rent never offers you a “similar “ or “comparable” model: It only rents Mercedes models. There’s a huge selection as well — everything from A-Class to S-Class vehicles, including convertibles and off-road vehicles. In other words, Mercedes-Benz Rent can offer you the right vehicle for every occasion. What’s more, we only offer new Mercedes models with state-of-the-art technical features and safety systems. All vehicles are completely serviced on a very frequent basis as well. The rental fee includes liability and comprehensive insurance (with a deductible).
MB Rent EQC subscription: Another possibility to enter the world of electric mobility is offered by the Mercedes-Benz Rent platform operated by Mercedes-Benz Bank and Mercedes-Benz Sales. Since July 2020, Mercedes-Benz Rent has been offering customers a simple and convenient way to get acquainted with the world of everyday electric mobility and the benefits offered by the EQC model — without having to make any long-term commitment.