When purchasing a new vehicle, many consumers are faced with many choices of financing, and part for the decision that needs to be addressed is buying or leasing. In this paper we will look at the differences between buying and leasing a new automobile. Automobiles
In America, cars have become a way of life, and most people could not live without one. They have also become the second largest financial commitment that most people will make, outside of buying a house, and for some people, there car will cost more then their house (Bauldings, 2004). Lease Versus Buying
Obviously in today's financial world there are numerous options to consider when making this financial decision. Essentially the decision you want to make is based on what is the best way to finance this purchase that meets your particular needs. It is also important to differentiate between acquiring business or personal assets (Bauldings, 2004). In either case the fundamental issues are pay cash, finance at a bank or some other financial institution, and leasing. The lease versus purchase decision involves the application of capital budgeting methods (CLA, 2005). Now we need to determine the relevant cash flows and apply present value techniques. The four steps to do this include: after-tax cash outflows for each year under the lease alternative, after-tax cash outflows for each year under the purchase alternative, present value of cash outflows associated with the lease, and choose the alternative with the lowest present value of cash outflows from step three (Balance, 2005). Leasing.
There are two basic kinds of leases; With a closed-end lease, at the end of the lease term you simply return the vehicle; you do not owe any additional money unless the car or truck shows more-than-normal wear and tear, has been damaged, or has been driven more miles than are specified in the lease. An open-end lease generally offers lower monthly payments, but includes a specific value that the vehicle will be worth at the end of the lease period (this amount is called the "estimated residual value"). If the vehicle is worth less at the end of the lease, you owe the difference (LeaseGuide, 2005). Leasing Advantages.
There are short-term cost advantages to leasing. The monthly payments on a leased car are usually far less than on a loan, even for a luxury model. The down payment usually works out to be less than what you would pay for a bought car as well. Because the typical lease is for three years, most repairs are covered by factory warranty (Balance, 2005). Sales tax is cheaper too, as you only pay it on the financed portion. An attractive feature of leasing is the ability to drive a new car every few years. You never have to go through the hassle of selling it; you just turn it in at the end of the term. Leasing Disadvantages.
While the payments are often reasonable, you never gain equity in the car. If you were to buy it at the end of your contract, it would cost you a lot more than if you had just bought it in the first place. Leases are restrictive. If you exceed the yearly mileage limit you will be assessed an extra charge. You must take good care of the car as well, as any nicks or dings will be considered "wear and tear" and will cost you. Comparing lease offers can be very confusing, making it hard to know if you got a good deal. And you will find it difficult to get out of your lease early if you want to - a problem if your driving needs or financial circumstances change (CLA, 2005). Interest Rate.
Leasing is typically more expensive than conventional bank financing from an interest rate perspective - always ask what the rates are. Don't forget that you will end up paying GST and other sales taxes (if any) on interest since interest is built into the monthly leasing cost. It is possible that this can add 0.5% to the interest rate assuming that the GST is eligible for input tax credits or 1.0% if not (e.g. buying personally). On the other hand, if you do not...
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