Driven by savings, auto leases shift into top gear

Leasing cars on a long-term basis from rental car companies is becoming a cost-effective new fad in Korea, where more cash-strapped consumers see it as a viable alternative to forking out a huge lump sum on purchasing a new vehicle. Taking out contracts of two years on a higher-grade car is also considered a more sensible bet than making a short-term rental as it enables drivers to save money on insurance and tax, which are included in the leasing agreement.

Moreover, customers can pay the difference when the contract expires and buy the vehicle outright if it takes their fancy or their financial situation improves. Short-term rentals are usually offered by car rental companies while leases, which last usually a long term, are provided by capital financing companies.

Shin Dae-hwan, 42, said he saved 3 million won ($2,577) on insurance and tax by opting for a long-term lease of his Hyundai Grandeur HG300 from a rental car company. He rented the car, which retails for 40 million won, for three years.

“There is a growing perception that cars can be leased like water purifiers, and that this is preferable to owning them,” said a spokeswoman at KT Kumho Rent-A-Car. “Maintenance fees are included in the leasing fees, so it works out to be very convenient.”

Moreover, rental car companies usually offer vehicles that run on cheaper liquefied petroleum gas, which can almost halve fuel bills, whereas capital financing firms only provide those powered by gasoline.

The major drawback for leasing cars from capital financing companies comes for drivers that clock up heavy mileage, as the lease contracts usually compel the signee to pay between 50 won to 80 won for every kilometer if total mileage exceeds 100,000 kilometers over three years.

Koreans used to be reluctant to rent a car for everyday use because there was a negative stigma attached to driving a borrowed car. Rentals became largely the domain of tourists or those requiring a vehicle for work-related purposes. However, companies often provide more luxurious or prestigious rental cars for their executives.

However, the situation has now changed. Among 18 million cars registered in the country last year, rental cars offered from rental car companies accounted for 288,000, or 1.8 percent last year. This represents on-year growth of more than 10 percent from 257,000 in 2010. And whereas in the past corporate customers were the main clients of leasing companies, an increasing number of individuals are now seeking them out.

According to AJ Rent-A-Car, individual long-term leases jumped 33 percent from 2010 to 2011. KT Kumho Rent-A-Car reported a 5 percent rise over the same period.

By Cho Hye-kyung, Limb Jae-un [jbiz91@joongang.co.kr]