After becoming a licensed driver, the dream for many is to own their own car, their dream car. In an ideal world, we’d buy it with cash, but purchasing a car outright is not feasible for everyone, even for those who can afford it. If you are planning on purchasing a vehicle and debating between buying and leasing, here are some advantages and disadvantages to help with your decision.
Advocates for leasing love the ability to get a new car every few years, while car owners love that their car is completely theirs. Although buying a car means higher monthly payments, it does result in a product in the end.
Leasers only need to pay a small amount for the car they use for a certain period of time. Payments mix principal, interest, and taxes. One of the greatest conveniences is the cheaper cost of a loan as you only pay the depreciation cost for the time you drive the car.
Conversely, when buying a car, your loan is for the initial price of the car along with taxes. As a result, monthly loan payments are higher than leased vehicles despite the car model being the same. Car owners, however, get to keep their car once it’s paid for, and it is theirs to sell or keep as they choose.
But what is better from a tax perspective? And how can you save the most money?
If ask your business accountant about the specific differences for each we’d be happy to explain it in more detail.
The answer to the question: To lease, or buy my car really changes based on lifestyle and preference.
Benefits of Leasing a Car
Leasing a car allows you to enjoy the technology and vehicle for much less than buying it over the same term. For drivers who may not have their eyes set on a specific model or who love to move every now and then, this option offers more flexibility.
Additionally, leasers pay less in the short term and they have lower monthly payments. This option adds more flexibility for drivers with less upfront money. Drivers with a tighter budget or inconsistent cash flow may appreciate the lower payments. In order for car owners to enjoy similar financial benefits, they’d need to extend their auto loan to the maximum, however, the added interest often makes it not worth it.
Another benefit is there is no long-term commitment necessary. A few years pass by quickly. With each year comes newer cars and more options, so you won’t need to be stuck with the same choice after a decade. Leaseholders don’t need to worry about the value of trading in their car or long-term maintenance.
The automotive world is also creating more leasing programs such as shorter time commitments and the ability to upgrade their vehicle within their lease period.
Drawbacks of Leasing a Car
Leasing a car is not all pleasant. Some people prefer no-monthly payments and the peace of mind of paying off a car is something select car owners can enjoy. With car ownership, the car owner saves in the long-term as monthly payments eventually cease. In comparison, a leaser who continually leases every few years spends more and more with little return.
A second tradeoff is a car must be maintained. Most leasing car companies require that the car is returned in the same condition it was purchased in. Although there is a bit of leeway for normal wear and tear, excess depreciation may jeopardize your lease and the dealership will charge for the cost of repair. Before purchasing look into any warranty or programs the dealership offers to cover the cost of repairs.
Standard leases also limit the amount of kilometers you can drive per year. If you frequently drive outside your city or country, a lease may not be the best option as you push the allotted kilometre allowance. Some car dealerships offer options to purchase more kilometres upfront, but for the ones that don’t, you will be charged for exceeding the limit.
Leasing a car might also depend on your company’s structure. It might be more advantageous being fully incorporated, so you might consider incorporating your business.
Pros of Buying a Car
Not having to worry about returning a car after three years is one of the major benefits of buying a car. Car owners own the car for as long as they need or desire to. With a stable cash flow and a large downpayment, car owners may not a considerable amount of time paying off their car. However, car loans are one way to build your credit history as they are consistent every month.
Depending on the car you purchased, a car can last a long time. If you’ve paid in full or paid off your car, you won’t need to worry about car payments any longer meaning more cash to spend on other bills or save/invest.
An additional advantage is it’s yours! You don’t need to make repairs or worry about the kilometres you drive as it is yours to keep.
Cons of Buying a Car
Like many other expenses, cars require maintenance and care. Unlike with leased cars, your car is your responsibility. After the warranty expires, it is up to you to cover the cost of repairs, switching out tires, and other fees. One way to save yourself is by purchasing an extended warranty to cover the cost of unexpected mechanical repairs.
Another downside is the value. As soon as your vehicle is off the car lot, it starts to depreciate in value. After a few years of use, it will become harder to sell or trade. Compared to a house that may go up in value with renovations, car modifications generally do not add resale value.
Lastly, you must also consider Personal Service Corporations and their impact on leasing or owing a car. Personal Service Corporations provide personal services to individuals and groups. An incorporated business that provides services that an employee of the company would usually perform is considered a Personal Service Corporation and the individual, an “incorporated employee”.
Which is better for me?
Whether you lease or buy is up to you.
Leasing is perfect for those who want the latest car, pay a smaller monthly fee, and can trade it for another vehicle in a few years. On the other hand, car buyers may prefer the stability of having the same car and not worry about how many kilometres they drive. With enough income or cash flow to pay their auto loan, the monthly payments are not an issue for car buyers.
Have more questions?
Reach out to one of the small business accountants at Soleimani CPA, we’d be happy to answer any questions you have.
Call 604-781-2412, email, or schedule an appointment online.