There was a time when buying a car was almost always the way to go, especially in the long run. The problem with leasing a car is that you have to take the entire depreciation hit of the vehicle over the term of the lease, but you get none of the resale value of the car once you turn it back in.
Lease contracts have become more favorable for the consumer in recent years, and there are instances where leasing can make sense. The key is understanding the advantages and disadvantages of leasing a vehicle versus purchasing it outright.
Why Buy a Car Outright?
• No mileage charges to worry about. Drive all you want!
• No worries if the kids spill Kool-Aid on the back seat.
• Your payments come to an end, eventually – but you can still keep the car.
By keeping an eye out for deals and selling once in a while, you may be able to drive nearly cost-free (but you still have to pay costs associated with repairs, fuel and upkeep). (If you do it too often, though, the IRS may classify you as a dealer.)
• Factory warrantees are getting bigger, better and longer. In the past, ongoing service was one of leasing’s primary advantages; but now that you can purchase cars with substantial warrantees for as long as seven years, that’s less of a factor.
Advantages of Leasing a Car
• You often have a lower monthly payment.
• Because your payment is lower, you can use that money productively. You can invest it, for example, or redirect that money to pay down high-interest credit card debt. If your credit card rates are high, and you have a lot of debt to pay off, this can be a good option. Just remember, though, if you lose your job, your car won’t be far behind.
• Leasing for business can help to maximize cash flow. Cash flow is the lifeblood of businesses. You can have all the paper profits in the world; but without operating cash flow, you’re stuck. Leasing, rather than purchasing a vehicle can preserve this precious resource for you small business owners and entrepreneurs.
• Use your car for work? You can deduct your entire lease payment as a business expense. If you buy, rather than lease, you have to spread your deduction out over a number of years, under MACRS rules. This isn’t as big a selling point as some car salespeople think it is, though because you can also get a substantial first year deduction by purchasing a vehicle under Section 179 of the U.S. Tax Code. Talk to your tax advisor for more details on how this might apply in your specific situation.
If you drive a car a lot for business, you can deduct mileage instead of your lease expenses. Currently, you can deduct .58 per mile for business miles driven – even if you’re an employee, provided your boss doesn’t reimburse you. If you drive a lot, this is a much bigger deduction than taking the lease payment deduction.
Don’t Forget Insurance
If you wreck a car you lease rather than one you own, your reimbursement may be less than what you owe on the lease. You may want to get “gap” coverage to cover the difference. The price of “gap” coverage could wipe out a chunk of the monthly price advantage of leasing rather than buying, so bear this in mind.