With the many car financing options available today, people will almost always buy a vehicle for personal or business use. However, there are situations when leasing a car is more ideal than owning. Just like renting a house, a car lease has some features that can fit your needs.
The question is, how do you decide when to buy or lease a car? Read on and you’ll find out how to make the decision.
How does leasing work?
A car lease is essentially borrowing a vehicle for a set period (two to five years) in exchange for regular payments. Although the car is in your possession, the ownership still belongs to the lessor. At the end of the contract period, you have the option to return the vehicle or draw up a new contract with the lessor and continue using it.
Different Leasing Options
There are several options when leasing a car. First is the novated car lease, which enables you as an employee to lease a car from a finance company and your employer will make the monthly lease payments from your pre-tax salary. With this leasing option, you can either extend the lease, end it, or buy the vehicle by making a balloon payment directly to the finance company.
If you require a vehicle for your business, a good option is to get a finance lease. The finance company will buy the car and have it rented out to you over an agreed period. Unlike with novated lease, however, you don’t have an option to end the lease agreement. When the initial lease period ends, you should either purchase the vehicle or lease it from the finance company again.
Another leasing option you can go for is called an operating lease. It works like a finance lease except there’s no other option at the end of the lease period but to return the vehicle to the finance company. This option is ideal if your business requires multiple cars at once and you want to avoid the balloon payments or other costs of owning the vehicles.
Read our other helpful article: Novated Leasing: Is It Worth It?
Advantages and disadvantages
Whether you are buying or leasing a car, you’ll find upsides and downsides to it. The biggest advantage of purchasing a vehicle is you’ll get full ownership after completing the car loan payment. You can modify it however you want and sell it whenever you fancy.
On the other hand, it costs more to buy a car than to lease one. Aside from the monthly loan repayments, you’ll also have to pay for insurance, the interest cost, and registration fees. You’ll also pay for the repair, maintenance, and depreciation costs when operating the vehicle. It will also take a lot of effort to sell the vehicle when you need an upgrade in the future.
Leasing a car also has some drawbacks. Non-ownership is one of them, as well as not having the right to do performance and physical modifications on the vehicle. There will also be some driving restrictions imposed when leasing a vehicle, which includes limited mileage.
But a car lease has lower monthly payments than car loan repayments for the same vehicle. When you lease a car, you also don’t have to worry about maintenance, repair, and registration costs because the lessor or finance company will take care of them. A car lease will allow you to easily switch to a newer car model every time the lease contract expires.
Looking at the financial aspect of it, you’ll be basically paying less and less as the lease period progresses. That’s because the lease payment will be based on the car’s annual market value, which equates to the original price minus the depreciation cost. Lastly, you’ll benefit from leasing a car for business purposes because you can claim tax benefits from it.
Find out more about Car Leasing
Buying vs Leasing
Aside from the advantages and disadvantages, there are several things you should consider when choosing between buying or leasing a car.
Payments – The monthly car lease payments are much lower, which will help you save money in the long run. On the other hand, your monthly repayments on a car loan, though more expensive, will build equity on the vehicle and give you bigger and bigger ownership every time. Consider this difference carefully and decide where you want your monthly payments to go.
Cash flow – You should also consider your personal or business cash flow when choosing between buying or leasing a car. If you’re working on a low cash flow every month, leasing is the better option. Keep the lease period to one or two years, so you can lease a larger vehicle or buy a new car, should your cash flow grow bigger. Don’t make the mistake of taking out a car loan that you can’t afford because it could lead to late payment fees, large interests, or worst, repossession of the vehicle.
Savings – Both car purchase and lease require a down payment, which means you’ll need to look at your savings and see which one you can afford. You’ll also use your savings to pay for the processing, registration, and other initial fees. Just like with the monthly payments, a car lease usually has a lower down payment and initial fees. Although, there are many dealerships today that offer low down payment for purchases of new and used cars.
Mileage – Also consider how you will put the vehicle into use. Will you use it for long travels or just for daily work-home transport? If you think you’ll be putting on large mileage, then it might be better to buy the vehicle instead. That’s because car leases have mileage limits and you’ll get a penalty for the extra mileage you dial in. Ask the lessor how much the charge per extra mile or kilometre is and estimate how much you may pay more at the end of the lease period. Based on this, you can decide whether it’s worth getting a car lease or purchase.
Thank you for your interest.
Using this guide, you can make an informed decision about whether to buy or lease a car.
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