Leasing Vs. Buying a Car for Business
If Shakespeare lived in our times, no doubt he'd probably write something about 'to lease or to buy, that is the question.' Jokes apart, leasing a car against buying it is one of the important questions that a person who wants a car faces. It is really not possible to say for sure whether either is a better option, as it really depends on a number of factors.
The Dilemma Simplified
Now for the sake of simplicity, let me break this article down into the pros and cons of both eother way of obtaining a car.
Pros and Cons of Leasing a Car
For those who don't know what a lease is, this is really going to be a tough lesson in finance. A lease is an arrangement where a person gets the car for use from the present owner of the car. Both the lease giver and the lessee sit down and estimate the present value of the car. The lessee tells the lease giver the amount of time for which he intends to hold the car and how many miles he'll be typically using the car for. The lease giver then factors in the depreciation that will take place on the car with the usage and then calculates the resale value of the used car at the time when the lessee is done with using the car. The difference between the current price and the resale price is the amount that the lessee has to pay to the lease giver for using the car over the period of use. The lease giver and the lessee will then work out a payment schedule.
The Pros: Well the cost of lease, more often than not is a lot less than buying the car. Suppose you lease a car worth $40000, the resale value of which is estimated to be $24000, you get your car for the amount of time you've asked it for, for $16000. Of course the tax component will be over and above that. Hence a lease is clearly cheaper. From the point of view of a business too it makes good sense, because businesses don't really use a one car for too long and hence for a short term use, a lease is a cheap and viable option. Secondly, with the car loan market not too strong at the moment, it can be really difficult to get the loan for your new car. You can even lease a car with bad credit.
The Cons: Well lets face it, for the layman, a lease agreement can be really tough to understand. Secondly, a lease brings in restrictions on miles driven. Suppose the lease giver and the lessee agree on driving 20000 miles over the year of lease, the lessee cannot drive more miles than that because the resale value is calculated on the number of miles driven. And if he does, he will have to intimate the lease giver and pay an extra charge.
Pros and Cons of Buying a Car
Not too many of us have the financial muscle to buy a car out of our savings. So for the sake of this article, I will be assuming that you are buying the car on loan.
The Pros: Simple, you get the ownership of the car. The full and final right over the car which allows you to drive wherever, however and how much ever you want to. Secondly, you get the right to resale the car. So if you take the previous example forward about the car for $40000. If you use it for a year, and sell it later for a resale value of $24000, your net cost is still $16000. The only difference being that when you buy, you pay $40000 and when you lease you only have to pay $16000.
The Cons: Well when you buy a car on loan, you first have to pledge a security for the loan and pay a hefty down payment, which you can avoid when you buy on lease, subject to your contract details. Secondly, suppose you have two options, take a loan of $40000 and buy the car or take a $16000 loan and lease it, the interest payments on the former loan will be much higher. Thirdly, there are robust chances that you won't get a loan so huge for a car in the current financial situation, and even if you do, the interest rate will be a bit on the higher side. Fourthly, you can only get so much money on loan. If you take a car on lease, you can get a much better car in that much money!
So these were some things to think about when you ponder over leasing or buying a car. If you ask me, if you're thinking about leasing or buying a car for business, I feel you should take the option of a lease. Because businesses don't use cars for too long and replace them quickly. And there is no sentimental value of ownership attached to the car for the business too! But if you're buying it for yourself, you really have a decision on your hand. So check out which option gives you a better deal and go for it.
