When a person is looking to obtain a new vehicle, they have the choice of purchasing it, usually via financing or to lease it for a certain term. Businesses often weigh the options between financing and leasing not only for vehicles but for equipment as well. Financing and leasing each have advantages and disadvantages that need to be studied and understood before a commitment is made.
Firstly to frame the difference between finance and lease, think of a house. You can purchase a home via mortgage or financing that you can keep forever or sell in one month if you so desire. You can remodel, paint or add a garage. It is your house to do with as you please. A lease is like renting the same home but with a distinct contracted time frame with penalties for leaving early and you are not able to paint, remodel or add a garage. Also if you get a clogged sink, if not under warranty you have to pay for the repair.
So that leaves the question is there ANY advantage of leasing? Leasing has several advantages over buying:
- No major up-front cash out lay like a down payment
- Cars and equipment can be updated easier and more frequently which is especially important when dealing with technology that updates rapidly like computers.
- Vehicles especially but equipment too is usually covered under warranty for the length of a lease term.
- No need to trade or sell the items at the end of the term as the lease company takes the items back.
- Tax breaks on GST and a lease is used as an operating expense on a balance sheet which has advantages for cash flow and profit and loss statements.
Financing too has distinct advantages:
- Ownership even with a lien you are able to make modifications
- Less expensive overall than leasing
- Item is considered an owned asset therefore a liability on the balance sheet and qualifies for depreciation.
- No time limitation. The item can be traded, sold or upgraded as needed
Now on the flip side are the obvious disadvantages of each starting with leasing:
- No ownership, therefore unable to modify or customize it
- Locked into a specific term with large penalties for early termination
- Often limits with stiff penalties on usage in terms of miles, hours, copies etc.
- Depending on the type of lease, there may be a pay-off or residual payment at the end of the term
The disadvantage of financing:
- Considerable capital outlay upfront with the down payment
- Monthly finance payments are generally higher than that of a lease
- Selling the asset can be an issue and usually needs to happen before a new item can be purchased
- As the vehicle or equipment become older, repairs and maintenance increases
A business owner will have to consider cash flow and tax strategy along with a little crystal ball reading as far as expectations to meet technological challenges in the near future in order to determine whether financing or leasing is best for the business. Individuals wanting a new vehicle have to be willing to commit to the term and be prepared for additional costs with mileage overage and fees for excess wear and tear. Leasing and financing have advantages and disadvantages to each therefore arming yourself with as much knowledge as possible will help individuals and business owners make informed decisions.