If you are considering car leasing for your business, you may be wondering if it is better to lease or buy. Here are some factors to consider:
Loan Payments vs. Lease Payments
Buying a car means a loan for a specific amount which you will have to pay back even if the value of the car goes below the amount of the loan. This can happen if the car is in an accident, for example.
With car leasing, the residual value at the end of the lease can lower the lease cost, and if you get a closed lease, the lessee has no obligation to purchase the leased asset upon lease expiration, that person does not have to worry about whether the asset will depreciate more than expected throughout the course of the lease. Thus, it is argued that the closed-end leases are better for the average person.
Do you have the cash for a down payment?
If you are concerned about putting up cash from your business for a down payment, consider a lease. Some leases do not require a down payment, but most car loans do.
Who will be driving the car?
Whether you lease or buy also may depend upon who will be driving the car – you as the business owner or one of your employees. As an owner, you have more control over the mileage. If the car is being driven by an employee, you may not be able to control personal use of the car. In the case of an employee driver, it might be better to buy the car rather than lease it.
How many kilometers will you be driving each year?
Take some time to determine how much your business vehicle will be driven. Car leasing terms include a limit on mileage and you will have to pay more for the lease if you want additional kilometers covered.
Car purchases, on the other hand, do not have a limit on kilometers, but remember that the car will depreciate faster if it has more kilometers on it.
Should you pay the additional cost of maintenance?
If you are going to do car leasing for your business vehicles, spend the extra money for routine maintenance, including oil changes and tire rotations.
Many leases require maintenance. Even if you want to purchase one or more cars for your business, maintenance is still important.
What do you want to do with the car at the end of the lease?
When you have paid back a car loan, you still own the vehicle and you can keep it, sell it to an employee, or use it as a trade-in. At the end of a car lease, you give back the leased vehicle and get another one, or you can negotiate a purchase with the dealer.
How do taxes and depreciation work for a leased car?
Car leasing payments are tax deductible, based on percentage use of car for business. Both leased vehicles and owned vehicles may be eligible for depreciation, including special accelerated depreciation, depending upon the type of car and other factors. Check with your tax adviser for more information on depreciation.
Whether you lease or buy a car for your business depends on cash flow, kilometers, and other issues. Spend the time to research both options before making a decision.