Purchase or Lease a New Car?

My previous article, Buying a Car: New or Used?, addressed the most common factors which should be considered when deciding whether to buy new or used. For those who decide to acquire a new vehicle, this article explores the main distinguishing factors between purchasing and leasing. So, Purchase or lease?

Business Use

If you are acquiring a new vehicle for business use, it is often preferable to lease. This is because the entire annual leasing cost can be claimed as an expense for income tax purposes, up to a specified limit.

If you purchase a vehicle, the expense you claim for income tax purposes must be in the form of Capital Cost Allowance (CCA), which allows you to claim a percentage of the cost of the vehicle each year, again up to a specified limit. This CCA, usually 30 %, is designed to reflect the reduction in value of the vehicle over time as a result of normal wear out. In the year of purchase, you can claim CCA on only one-half of the original cost. This is known as the half-year rule. In subsequent years, you can claim CCA using the declining balance method, which means that you claim CCA on the original cost of the vehicle minus the CCA you claimed in previous years.

Duration of Use

How long you intend to keep a vehicle is an important consideration when deciding whether to purchase or lease a new car. You may intend to have the vehicle for as long as possible, either while it is providing dependable service, or perhaps to the end of its useful life. If so, then buying the vehicle is recommended since lease agreements are for a limited period of time.

Amount of Use

Your driving needs and driving habits are factors which can influence the decision to purchase or lease. If you rack up above average kilometrage each year, a lease may not be for you. Most lease agreements impose an additional charge, generally 3 or 4 cents per km, after exceeding the annual limit which is usually 20,000 km. You can purchase additional kilometer usage when entering into the lease agreement, which may suit your particular needs, such as business use.

Monthly Payment

In recent decades, as the purchase price of new vehicles escalated due to inflation, thus driving up the monthly payment on a vehicle loan, vehicle leasing became increasingly popular. The lease concept allowed a prospective buyer to lease a vehicle for a specific period of time, usually 4 or 5 years when first introduced. With a buy-out option at the end of the lease, the monthly lease payment was very attractive, often 25 % less than a loan payment on the same vehicle. This made many people lean towards leasing when choosing to purchase or lease a new car.

However, the losses incurred by many vehicle manufacturers when reselling returned leased vehicles prompted them to restrict, or in some cases discontinue, the use of leases. In more recent years, in an effort to generate sales, vehicle manufacturers are again offering a variety of lease options. As well, they are aggressively offering extended loan options which allow financing at competitive interest rates for periods of up to 84 months, in order to reduce the monthly payment.

If the amount of the monthly payment is a concern, as it is for most vehicle buyers or lessees, there is now a multitude of options to choose from, but do consider the other factors.

Option to Buy

Most lease agreements feature an option to buy clause, giving the lessee the opportunity to buy the vehicle upon maturity of the lease. If the lessee exercises this option, the purchase amount is pre-calculated using the original purchase price of the vehicle and the amount paid out during the course of the lease. For someone who has leased a vehicle and then decides to buy it, this is a convenient option. However, it must be noted that the purchase price at that time for the lessee is fixed, regardless of the condition and book value of the vehicle. Purchase or lease? Both! But this is probably the most costly way to ultimately own the vehicle.

Damage or Irregular Wear to a Leased Vehicle

One last important note on leasing: when returning a leased vehicle at the end of the lease period, the vehicle is thoroughly inspected for irregular wear and damage. Such defects as badly worn tires, dents and scratches exceeding a certain size, and significant tears or holes in the upholstery, will be costed and billed to you. However, most car dealers are reasonable and will allow normal wear and tear.

Conclusion

As can be seen, there are many factors to consider when choosing to purchase or lease. Most of us share the same concern of affordability with respect to monthly payment, but we must always be aware of the long-term cost as well. It is important to avoid focusing entirely on the low monthly payment, as the interest cost of long term financing or leasing may be excessive. Achieving the right balance between the monthly payment and the length of the financing or leasing term, can result in significant savings.

Only you can determine whether you should purchase or lease a new vehicle – just be sure that you carefully consider all the pros and cons.

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