To lease or to buy is a dilemma faced by almost every potential car user. Both the options seem lucrative in their own regard. However, to get a financial perspective on the two choices, you need a deeper understanding of the terms leasing, and buying. When you compare the financial and tax benefits in both scenarios, you come to a conclusion that both have their own advantages and disadvantages, and hence, the decision to opt for one, has to be made very consciously.
Leasing Vs Buying
Leasing is a concept in which a lessor leases a commodity or realty to a lessee. The term 'lease' refers to the contract which permits the lessee to use the commodity or realty for a predetermined time period at a previously agreed cost. Car leasing means you rent a vehicle from the lessor for a particular time period and for a fixed monthly payment.
A contract specifies the amount to be paid as down payment, time for which the car is to be leased, and the miles that it can be driven during the lease period. The clauses of such contracts are drafted only after the lessor and lessee come to a consensus regarding the down payment amount and monthly payment for the vehicle. These amounts are derived by subtracting the resale value of the car after the prescribed time period, from its current price. The difference in amount is the lease amount which is to be paid by the lessee. The following example should give you a better understanding of the whole concept.
If a car costs $40,000 today and its resale value plummets to $30,000 in the next three years during the lease, then the lessee has to pay $10,000 as the lease amount during these three years.
After the lease period is over, the lessee can lease a new car if he wishes. The concept of car buying is pretty simple. You borrow money from a lender and buy a car in full. You make monthly installments and accordingly go on gaining equity of your car. After the loan is repaid, the car becomes rightfully yours.
Pros and Cons of Leasing and Buying
Owning and leasing both, involve certain pitfalls. Buying a car is obviously an expensive affair. You need to pledge a hefty security for your loan to get it approved. Besides, the car value depreciates alarmingly as soon as you drive it off the dealer's parking lot. Thus, when you decide to resale it, you end up with much less money than what you actually invested in it. On the bright side, it's your car and you can do anything with it without worrying about a contract. You can customize it, drive as many miles as you want, resale it, or simply scrap it when you are done using it.
On the other hand, when you decide to lease a car, you end up paying far less than what you would pay for owning one. Other advantages of leasing include the ability to drive newer models which may not be affordable to you otherwise, relief from the hassles of finding a new owner for your car and estimating its depreciated cost, etc.
However, on the flip side, you are bounded by the lease contract which only permits you to drive the vehicle for a fixed number of miles and for a fixed time period. If your use exceeds this limit, you can be fined for it. Similarly, if you do not maintain the vehicle in good condition, you will have to shell out extra money as penalty. Also, if you decide to terminate the contract you will be required to pay a certain amount as penalty. This amount may be equal to the impending amount of your contract.
Thus, one should take his requirements into account and assess his financial position before making a decision to own or lease.