Lease or Buy?

With people starting to head back to work, my experience tells me that business owners quite often think about buying a new car (don't ask me why, I just have experience in the industry that supports this trend).

I'm regularly asked which is better - buying a car or leasing a car? The answer is.....it depends.

The benefits of buying a car are quite straight forward - the car is yours from day one, you have an asset (albeit a depreciating one) and you can sell it when you want or keep it for as long as you want. Once you've paid for it, you don't pay any more (other than maintenance). You also get a GST deduction on purchase.

With leasing, there's then 2 different forms of lease.

An operating lease is like a long term rental car. You stipulate how many kilometres you're going to do over the trm of the lease, what you want included in the lease payments (registration, maintenance, tyres, etc.) and you drive it away. The benefits are that the payments you make a fully tax deductible (income tax and GST), you get a new car at the end of the lease and you don't have to worry about disposing of the car. Also, the risk is all on the lease company in terms of residual value (what the car is worth at the end of the lease). It is also quite an affordable option for a new car as built into the payments is a residual amoutn meaning that you are not funding the full value of the car. The biggest disadvantage is that you are locked in to the lease for its term (albeit with the ability to cancel it with an often hefty cancellation fee) and you have no rights at the end of the lease in relation to what happens (you may be offered the vehicle to purchase at a price but the lease company doesn't have to).

The other type of lease is a finance lease. The vehicle is yours from day one but is financed by a finance company. The vehicle sits on your balance sheet as an asset but so also does the liability to the finance company. This has the effect of increasing your company's indebtedness, which is not always a good thing. It is quite a flexible arrangement as you can structure a "balloon payment" meaning the monthly repayments are lower but you have to pay off a chunk every so often (usually milestones like 12 and 24 months).

So, which is best? I stress that this is only my personal opinion and the answer depends on your own circumstances but my personal preference is towards an operating lease. At the end of the day, by head tells me not to sink my own money into an asset that will always depreciate.

Note: Rocksalt nor Steve Mutton will accept any liability whatsoever for any reliance placed on the above views. To analyse the best option for you or your business, please contact Steve, RockSalt or your own professional advisor.