A car is one of the biggest purchases most people will make, and one of the most common considerations is whether it is better to lease or buy a car.
The answer to that question depends on many factors, including:
- Your cash flow
- Your long-term plans for the vehicle
- How hard you are on cars
- Whether the car is used for business or just personal use.
Some of the many considerations are as follows.
What about monthly cash flow?
When considering whether to lease or buy a car, cash flow normally emerges as the primary consideration.
Leasing a vehicle normally offers lower monthly payments. If having lower monthly payments is your principal concern, then leasing the vehicle is probably the choice for you. The downside, of course, is that the payments continue as long as you have a lease.
Buying the vehicle, if you finance it, will have higher monthly payments, although each of those payments is putting more equity into your vehicle. And, yes, there will come a day when you own the vehicle outright and the lender’s grip on you will be released.
Is “having an asset” important to you?
When you buy a car, you are adding an asset to your net worth. Of course, you own an asset that is going down in value, but that’s a hard truth about cars.
When you lease, you are not building equity. That car is eventually going back to the financing company, or the dealership, or whoever you have leased it from.
How much do you drive? How long do you plan to drive the car?
Your plans for the car are also worth considering.
Leases come with annual mileage allowances, and additional kilometers will cost you extra. If you plan to do a lot of driving, then a lease may not be for you. On the flip side, if you are a low mileage driver, then a lease is a low-monthly-cost way to get a good car.
Similarly, you should think about whether your plans for the car are short or long-term.
If you plan to use the car for only a few years, then leasing will probably be your best option. Over that short period, you will ultimately pay less for using the vehicle.
If you plan to use the car for many years, then it’s probably better to buy a car, as you will have a few years where you own the car outright and you have no loan payments.
Do you drive your car for business?
If you use your car for business, then there are tax benefits to consider and this will impact whether you lease or buy a car.
If you lease the car, you may be able to deduct lease payments, subject to the limits set out by the Canada Revenue Agency (CRA).
Regardless of whether you lease or buy a car, using it for business means you can deduct the expenses related to the use of the car, such as gas and maintenance.
Are you hard on cars?
Do you have a tendency to put scratches on vehicles? The occasional fender-bender? If so, then a lease may not be for you. Most lease agreements have wear-and-tear fees. In the end, you will end up paying more.
How stable is your life?
To lease with confidence, you’ll need to know where you will be in two or three years. If there is a chance you may become unemployed, move out of country or have a major change in your household, then a lease is not for you.
Entering into a lease is a complex legal and financial arrangement with a company. Breaking it has significant fees. Those fees are often high enough to eliminate the savings you incurred through those low monthly payments. If you think you may not be able to fulfill the contract, then don’t sign it.
What is your experience with shopping for vehicles?
Have you used a vehicle for business purposes? What tax benefits have you claimed as a result?