| |
|
 |
| |
Buy or Lease? Decision Demands Study - March 10, 2007
Should you buy or lease your next vehicle?
That's a much-discussed question in the retail car industry.
First, let's examine the basic differences between leasing and buying.
With leasing, you are essentially renting a vehicle for a specific period of time, usually two to four years.
You, as the lessee, are expected to honour the terms of the lease agreement and return the vehicle to the dealership in reasonable condition after the lease has expired.
Normal wear and tear is expected on any leased vehicle. But major vehicle damage, neglect or excessive kilometres normally lead to stiff financial penalties for the lessee.
Lessees have the option of purchasing the vehicle at the end of the lease.
This "buy-out" clause is written into the lease agreement.
From a financial standpoint, it could make sense to buy out a leased vehicle rather than pay a penalty for excessive wear and tear or kilometres.
When buying a car, truck or van, you, as the purchaser, essentially own it when you drive it off the lot.
Your sole financial obligation is to the bank or financial institution that lent you the money.
Dealerships also offer competitive and flexible financing through their manufacturers, in which case your obligation would be to the manufacturer.
In purchasing a vehicle outright, you will either pay cash for it or finance it through a bank or financial institution.
At the end of the payment term, you become the exclusive owner.
Each buyer must decide if leasing is a better option than buying.
Carefully examine your driving habits and lifestyle before making a decision.
While auto leasing is on the rise in Canada, accounting for 70 to 80 per cent of sales at some dealerships, this form of vehicle ownership isn't for everyone.
In the past few years, some manufacturer leasing companies have aggressively promoted financing as a viable alternative to leasing, and more and more consumers are choosing this form of vehicle ownership.
If you routinely drive 35,000 or more kilometres a year, then leasing may not be your best option ? unless additional kilometres are factored into the deal.
What about the cost of leasing versus buying? Which is more expensive?
Let's examine the costs of leasing a new sedan. In our scenario, the car retails for $28,000. If you lease it over 48 months, it would have an end, or residual, value of $15,000.
The depreciation on this four-door is $13,000. That figure is the total amount payable over the four-year term of the lease, plus finance charges and fees.
So you are paying for only a portion of the car's total cost and your financial outlay is less than if you'd bought the entire car.
When you purchase that same $28,000 sedan and apply an identical interest rate, you are responsible for the full cost up front, plus finance charges and applicable fees, not just the depreciated portion of the vehicle that you use over four years.
Based on this scenario, your monthly costs for leasing could be slightly less than for buying. But the amount you put down on the vehicle (or your trade-in), prevailing interest rates and applicable fees are also factors.
With a leased vehicle, monthly payments are usually lower than monthly payments for a loan on the same vehicle, which frees up cash flow for other expenditures and/or investments.
Lease customers enjoy the advantage of driving a newer vehicle every two or three years. They would rather return a car to the dealer with some value attached to it and step into a new one.
That's important for some buyers.
On leased vehicles, you pay tax on the monthly payments, as opposed to paying all the tax up front at the time of purchase.
Many customers resent having to pay all that tax to the government, before they have paid for the vehicle in full.
Leasing may also appeal to drivers who use their vehicles for work.
In some situations, a portion of the monthly lease payments may be used as a partial tax write-off (check with your accountant).
But there are potential drawbacks to leasing. For example, the financial penalties for putting on excessive kilometres can be high.
If the lease allows for 96,000 kilometres over four years (which is standard), and you return the car with 150,000 klicks on it, then you will be charged for 54,000 extra kilometres.
With excess charges ranging between 8-to-16 cents a kilometre, the lessee would be required to pay an extra $4,320 to $8,640 when he/she returned the car.
So, before signing any lease deal, it's important to know how many kilometres you anticipate driving.
Lease customers don't generate any equity in their vehicles over the term of the lease. At termination, you simply hand the keys back to the dealership and walk away.
If you can afford to buy a car outright, without having to finance it, that's great. You will save hundreds ? sometimes thousands ? of dollars on finance charges on the borrowed money.
But most consumers aren't in a position to pay cash and have to finance their vehicles with a lender.
Purchasers tend to drive vehicles longer than lessees. They also like owning their ride after three or four years: the equity in the paid-off vehicle belongs to the car owner, not the dealership.
Leasing tends to be a bit more complicated than buying and, for that reason alone, talk to as many car industry professionals and friends as possible.
And make sure a lease deal is structured to suit your budget.
A decade ago, the Toronto Automobile Dealers Association worked with the Ontario government to introduce plain language lease contracts, used at dealerships across the province today.
For more information about leasing versus buying, visit www.tada.ca and click on the Consumer Info link.
|
|
|
 |
|
|
| |
 |
|
Home Page
