The decision to lease or buy an asset is an issue that business owners and individuals are faced with all the time. There are many things to consider when contemplating whether to lease or buy, be it equipment, vehicles or something else.
Creating a pros and cons list is a popular decision-making tool that helps people gain perspective on the decision.
Let’s weigh the pros and cons of lifestyle and financial considerations because, in my experience, they generally carry the most weight.
Leasing – The Pros:
- Generally a lower capital outlay;
- Possible deduction of the full lease payments for tax purposes in the year they are made, whether it is an operating or capital lease;
- Entire lease period is likely fully covered under warranty;
- No responsibility for eventual disposal of the asset, other than returning it to the vendor in acceptable condition; and
- Leasing allows the affordability of a luxury version of an asset that would otherwise not be affordable to purchase.
Leasing – The Cons:
- No ultimate ownership of the asset;
- Depreciation of the asset considered in the lease cost is unavoidable;
- Premium paid in the long run, if you continually lease;
- No enjoyment of payment breaks; and
- Limited number of kilometres allowed for vehicles, which can be very expensive at the end of the lease if you go over your allotted maximum.
Buying – The Pros:
- Ultimate ownership of the asset;
- Proper maintenance can offset the need for large future repairs outside of the warranty period;
- Payments eventually end and you still have the benefit of using the asset for the remainder of its useful life; and
- Unlike a lease, there is no limit to the number of kilometres allowed.
Buying – The Cons:
- Possible larger capital outlay;
- Slower deduction of the full capital cost for tax purposes;
- Responsible for the future disposal of the asset;
- Burden of deprecation rests with the owner; and
- Warranty period can end during ownership.
By no means are these the only considerations when determining whether to lease or buy. Financing options can make one option more attractive than the other; for example, a lease that comes with 0% financing. On the other hand, some vendors offer lower cash purchase prices.
Insurance costs may differ between a leased and owned asset. The residual value of a leased asset will drive some of the financial decisions and help determine whether or not there might be a purchase consideration at the end of the lease.
Lifestyle choices should be addressed. Do you want the responsibility of maintaining an aging asset, or of handling the asset’s disposal?
You may also consider wants versus needs. Will a more basic model suffice because it is more affordable, or can you spring for the luxury version as a treat for yourself?
Making the best decision requires careful consideration of everything mentioned in this article and more. The decision of leasing versus buying is very personal to everyone’s individual situation, and is not always crystal clear. You should discuss the options with your advisor and make a pros and cons list to better arm yourself with all of the information to make a decision that is right for you.
