Buying -v- Leasing

Is it best to buy or lease my next car?

When you are in the market for a new car there are a lot of decisions to make.

Should you buy with cash? Buy with Finance – or maybe lease which is like hiring a car for a fixed period at a fixed cost? For individuals making the decision between leasing and buying is a question of balancing financial and lifestyle choices and there is no clear cut answer.

Which is best? it’s another one of those “it depends” answers!! Ask most people and they will probably say that buying is the way to go – and from a financial perspective that may well be true, providing you are willing to make higher monthly payments, pay off the loan in full and keep the car for a few years. Leasing on the other hand can be a less expensive option on a month to month basis, and especially good if you like to change your car every 2 or 3 years.

So we’ll look at the pro’s & cons here to help you decide which is best for you.

The principal with Leasing is that the monthly payment covers the cost of the fall in value – depreciation – and the leasing provider’s profit.

This is why some up market cars can appear surprisingly cheap to lease as they are expected to have a “strong” residual value. Other factors affect depreciation such as fuel efficiency and tax. When fuel goes up in price gas guzzlers depreciate faster. Heavy mileage also has an impact on depreciation. In an uncertain world it can be prudent to lease because you do not have the responsibility of the residual value – if the car falls heavily because of fuel prices or political changes – you simply hand back at the end and the leasing company stand the hit.

So why do people lease a car?

It is less expensive. Leasing a car can often be the least expensive way to get into a new vehicle. The initial payments are usually less that the deposit on a car on Hire Purchase for example, and a lease is a great way to get a nice new car for less money that you would have to pay if you were to buy it. This is especially true if you take advantage of Special Offers as the leasing market is very competitive.

Lower cost of maintenance. As Leased cars are generally new they are almost always under the original manufacturer’s warranty, so there are no worries about costly repair bills – if anything serious goes wrong it should be covered. All you have to pay for is the regular servicing & maintenance. You can even chose to include this in the leasing payment.

You can have a new car every 2 or 3 years. If you like to be in the latest car then leasing means you can change every 2 or 3 years. Leasing turnaround is statistically shorter than if you were to buy the car, when on average the purchase cycle is every 6 years. Once you have reached the end of the lease term you simply hand the car back and start driving a new one. You know exactly where you stand financially and it is much easier than buying a car with a long loan period and wanting to change before the loan is paid off.

For businesses or business owners where “cash is king “there are huge advantages to leasing when compared with buying outright or using a hire purchase agreement. It keeps the cash in the business for more important things.

Let’s look at Personal Lease in more detail.

Personal Lease

• Drive a new car every 2-3 years.

Often the monthly payments to lease a car are lower than the repayments to buy a car on finance. As long as you are happy to continue to pay a fixed monthly amount for your car in the knowledge that you will own nothing at the end, it means you can look forward to driving a new car every 2-3 years with no worry about the depreciation or hefty repair bills as the car will have manufacturer’s warranty.

• No hassle with disposal of your old car.

There is no hassle disposing of your part exchange either – touting it round showrooms to get the best deal. At the end of the lease you simply had the car back and you are free to decide on a           completely new agreement for your next car, whether you continue leasing or buy new or used.

• No balloon payment at end.

There are no balloon payments at the end of the contract – unlike some of the personal finance schemes (HP or PCP)

• No option to own at the end.

While HP or a PCP may give you the option to own the car at the end – it is also a risk as you don’t know what your finances are going to be like in 2 or 3 years. You also don’t have the double            whammy i.e an upfront payment and a payment at the end.

• Road tax is included – so you don’t have to remember to renew it.

• Optional maintenance contract.

Most leasing companies offer you the option to include maintenance in your monthly payment which covers everything outside the manufacturer’s warranty (except damage). This gives you            complete peace of mind knowing all your costs are covered except fuel & insurance – so no nasty surprises.

• You get to choose the term & mileage. You decide how long you want the lease for, usually 2, 3 or 4 years – and you nominate the mileage. As mileage has a big effect on the monthly payments its good if you can be as accurate as possible which will avoid excess mileage charges at the end of the lease.

IMPORTANT TO NOTE: I have noticed in many of the on line articles it is suggested that the maximum annual mileage term on a lease is 10,000 miles per year and that there are heavy penalties for going over. That may be the case in America – but it is not so in the UK. We regularly write contracts of 30,000 or 40,000 miles per year and there is only an excess mileage charge if you go over that mileage. Excess mileage charges are designed to give you flexibility – not to be penal.

For Business Users

• Improved cash flow.

For businesses where “cash is king “there are huge advantages to leasing when compared with buying outright or using a hire purchase agreement. When you take out a Contract Hire agreement you are effectively paying the depreciation for the car or van monthly.

Conversely, when outright purchasing or taking a finance package, the full cost of the vehicle is repaid and no value is released until you sell it on. Even where we compare the cost of Hire Purchase with a balloon payment at the end – which we provide for some of our corporate customers – the monthly payments are higher almost without exception.

• Claim rentals as an expense.

Companies running cars for use in the business can claim up to 100% of the rentals against tax. This is C02 based and changes regularly so please check the most up to date rules with your accountant or here:

https://www.gov.uk/government/publications/capital-allowances-for-business-cars/capital-allowances-for-business-cars

• Reclaim VAT

Businesses that are VAT registered can usually claim 50% of the VAT back on the Finance element of the lease payment and if it is fully maintained 100% on the maintenance element of the payment.

• Reduce vehicle administration.

The administration of the vehicle is handled by the leasing company, showing huge savings on wages, training and record keeping.

• Higher return on investment.

Contract hire cars are not counted as assets. Therefore your company’s balance sheet will show an immediate improvement in the “rate of return” on capital employed (via the asset value of the balance sheet being reduced).

PROS AND CONS OF LEASING

Everyone’s situation is different, so here are some pros & cons of leasing v buying. Some of these points relate to finance others to your needs and lifestyle factors. At the end of the day is it about personal choice as there is no perfect answer to the question of whether to lease or buy – particularly for individuals.

Leasing pros:

You have lower monthly payments with a low initial payment.

You can drive a better car for less money.

You have lower repair costs because the vehicle has manufacturer’s warranty.

You can change easily every 2 or 3 years.

You don’t have to worry about disposal of your part exchange.

Leasing Cons:

You don’t own the car at the end of the lease. (Some contracts have an option to buy.)

You have to predict your annual mileage (however you can pay an excess at the end if you get it wrong.)

You may pay more in the long run than if you bought the car and kept it for years.

There may be refurbishment charges to pay at the end of you don’t put any minor defects right before the car is returned.

Leasing is not flexible and just like a mobile phone contract there will be costs associated with ending the contract early.

Buying pros:

You can modify your car as you please.

You can drive as much as you like with no excess mileage penalty.

You have more flexibility – you can sell the car whenever you want.

The car can be used as a trade in on the next car you buy.

Buying cons:

You have to pay a larger sum initially.

The monthly payments are usually more than leasing payments.

You are responsible for repair costs once the warranty expires.

Possible trade in or selling hassles when you decide to change your car.

You will have more cash tied up in a depreciating asset.

SUMMARY

At the end of the day – for individuals particularly, the decision is as much about wishes and lifestyle as financial.

When you lease you can get more car for your money because you only pay for the use of the car for 2 or 3 years instead of paying for the vehicle itself. Buying on the other hand frees you up from some of the restrictions of leasing, such as mileage, and the car is yours to do with as you wish –however, this freedom comes with a cost as far as the monthly payments are concerned.

Ultimately it is up to you to weigh up the pros & cons, determine your needs and decide which choice best suits your lifestyle.