Renting or leasing cars is accelerating big time

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Renting or leasing cars is accelerating big time

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Lee Joon-hee, an office worker in Seoul, recently took delivery of a new Sonata. But he didn’t go anywhere near a Hyundai Motor dealership. Instead, the 34-year-old Lee went to a local rent-a-car company and signed a long-term rental contract.

“I heard that long-term rentals are cheaper and I don’t have to worry about the complex process of registration, taxes or insurance fees,” Lee said. “And I still have an option to purchase the car after my three-year rental period, so it’s a good deal.”

The local auto market is changing as car owners like Lee explore other options to outright purchases. From car-sharing services to auto leases, Korea’s auto culture is truly evolving.

Rent vs. lease

For those who don’t want to buy a car, there are generally two options: rent or lease. They are basically the same concept, but there are some important differences.

Car rentals are done by rent-a-car companies that purchase cars and lend them to customers for a fee. For a long-term rental, which usually refers to three or more years, customers generally pay 30 percent of the car’s price as a deposit and then pay a monthly rental fee.

Since rental customers are not the owners of the vehicle, they are exempt from registration fees, taxes and insurance fees, although these costs are all included in the rental fees.

Even if an accident occurs, customers don’t have to worry because rental companies will take care of all the costs and a replacement. Maintenance of the car is also managed by the rent-a-car company.

Those cars are also exempt from any regional government’s vehicle rotation systems by plate numbers to cut back on traffic or parking congestion because rental cars are classified as business-use cars.

However, under the law, rental cars must be registered with a license plate that starts with the letters “Heo,” “Ha” or “Ho,” which means friends and neighbors can easily spot that the car is not owned by the person.

Auto leasing is categorized as a financing business. Instead of lending money, financial companies lend a vehicle and are paid fees and interest from the borrower.

Unlike rentals, those who lease their cars need to pay insurance fees, taxes and the registration. They also need to take care of the car’s maintenance on their own, although some financial companies pick up some of these costs.

Since the leasing service is not subject to the passenger transport service law, leased cars have normal license plates.

In addition, the driver of a leased car can choose his or her own insurance. If a leased-car driver doesn’t have any accidents, that will be reflected in his or her record and in a lower insurance rate in the future. People who rent cars get no such recognition from insurance companies.

“Because long-term rentals and leases give the impression that you can have an expensive car at a cheap price, some people sign such contracts without thinking about their credit ratings,” said Park Gun-woo at Sellingcar, an online car price comparison and assessment service provider.

“What’s important is that consumers should have a car that is within their economic capabilities.”

Growing market

Between the two business models, auto leasing is the bigger market. According to data from the Credit Finance Association, the size of the car-leasing market was estimated to be 5.9 trillion won ($5.7 billion) last year, which is nearly double the rental market’s 3.2 trillion won.

However, the growth of the auto-leasing market has been unstable since 2011 as competition among financial companies rose.

According to the association, the size of the auto-leasing market was 6.1 trillion won in 2011 and 5.8 trillion won in 2012.

In contrast, the rental car market has been growing steadily. Data from the Korea Rent-a-car Association shows that average annual growth of the local rental car market in the last five years was 13 percent. Last year, more than 371,000 new rental cars were registered, but this year the number will likely exceed 420,000 units.

And the big growth in the rental industry is in the long-term rentals from private customers.

According to data from KT Kumho Rent-a-car, the nation’s largest rental car company, a total of 35,564 vehicles were rented out on long-term rentals in 2013, which was 75.3 percent higher than in 2011. Among its long-term rental customers last year, 25.9 percent were noncorporate customers, which nearly tripled from 9.2 percent in 2011.

Park Jung-hun, a manager at SK Networks’ rent-a-car business, said that many private business operators or private customers started to use long-term rentals from 2011 after rent-a-car companies started marketing their services more aggressively.

“The reason why many private business operators went for leases is that they can expense the lease fee and get a tax benefit,” said Park. “Rental fees can be treated in the same way, but rent-a-car companies weren’t promoting that fact to consumers until 2011.”

Industry insiders said that long-term rentals by private customers became popular because of their relative cheapness compared to leasing or purchasing a car in installments.

According to data from SK Networks, the cost of a long-term rental of a Hyundai Grandeur HG300 for four years (including all taxes and maintenance) is 9 million won cheaper than leasing and 3 million won cheaper than buying the car on an installment plan.

“Rental companies can charge lighter fees than leasing companies because their cars are managed under business-use standards, while they purchase cars in bulk,” said an official from KT Kumho Rent-a-car. “Rental cars can also use LPG [liquefied petroleum gas], which is cheaper than gasoline or diesel, while the maintenance and insurance fees are all covered by the company.”

Aside from the cost issue, people’s attitudes about rental cars have also changed. Analysts said that more people are thinking of automobiles as a transportation tool rather than an asset, while people with money are also forced to become more cost conscious in difficult economic times.

“In the past, people thought a car with a ‘Heo’ plate was driven by someone who didn’t have enough money to buy his or her own car,” said Kim Pil-soo, a professor of automotive studies at Daelim University College. “However, as many corporate executives and people with professional jobs are driving rental cars with ‘Heo’ plates, that stereotype is now broken.”

Challenges for rental business

As car rentals become popular, rent-a-car companies are increasing. According to data from the Korea Rent-a-car Association, there were nearly 900 rent-a-car companies last year, nearly double from 2003.

The car rental business is considered a business with low barriers to entry. Anyone who has 50 cars and a parking lot can get a business license after reporting to the Transport Ministry.

However, the local market is dominated by five big companies: KT Kumho Rent-a-car, AJ Rent-a-car, Hyundai Capital, SK Networks and Redcap Tour. They account for more than half of the market.

Major car rental companies have focused on business-to-business or fleet rentals to big companies. But they are getting more interested in private customers.

“Compared to small rent-a-car companies, corporations have big advantages by having nationwide networks, financing, large discounts for fleet purchases and also brand value,” said Park Sang-kwang, a manager at the Seoul Car Rental Association.

In order to boost competitiveness and sustainable growth for the car rental industry, Park said that deregulation of car rental models is needed.

Under law, car rental companies can only offer passengers sedans or vans that can accommodate up to 15 passengers.

“In countries like the U.S. or Japan, buses and even trucks are offered as rentals, giving more choices to consumers,” he said. “Regulation of rental car driver services should also be eased because if customers want rental cars with drivers, rent-a-car companies can’t oblige because that is limited to disabled or older people.”

But for the car rental industry in general, competition continues to heat up as financial companies, which were previously focused on auto leases, are also entering the long-term car rental business.

“As of last year, rental cars accounted for only about 2 percent of total cars in Korea, which means that there is room to grow,” said an official from the Credit Finance Association. “This is why many financial companies are entering to exploit their know-how in auto-financing programs.”

Last month, Shinhan Card, the nation’s largest credit card company, announced that it was entering the car rental business. The company said it has been examining the profitability of the business from earlier this year after forming a task force.

“By the middle of next month, we will secure 50 cars and finish registering a rental car business,” said an official from Shinhan Card. “We aim to be a midsize car rental company by 2018 after having 20,000 rental cars.”

In the financial industry, Shinhan Card is a latecomer, as companies like Hyundai Capital and Samsung Card started car rental businesses five years ago.

Hyundai Capital, an affiliate of Hyundai Motor Group, is now the nation’s third-largest car rental company and has the biggest fleet among financial companies with nearly 40,000 cars. Samsung Card, an affiliate of Samsung Group, operates more than 10,000 cars.

Rent-a-car companies complain that financial companies invading their territory is unfair. While financial companies can enter the car rental business by just securing 50 cars and a parking lot, it is difficult for rent-a-car companies to enter the auto-leasing business since that requires permission from the Financial Service Commission and a minimum of 20 billion won in capital.

“Currently car rentals are governed by passenger transport service law, while leasing is under financial laws, but as leasing companies now offer maintenances services, the two are basically becoming the same service,” said Mo Chang-hwan, a researcher at the Korea Transport Institute. “There should be an auto rental law to manage any business regarding car borrowing.”

BY JOO KYUNG-DON [kjoo@joongang.co.kr]

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