| Should you buy your car or lease it? This is a | | | | traditionally or lease it - although the gap is usually |
| question that we hear often and as usual, the | | | | larger when leasing since a smaller portion of your |
| answer is that "it depends." It is also an answer | | | | monthly payment goes toward reducing your |
| that I could compose an entire book about. | | | | financed balance. If you are in an accident and |
| First of all, let me start with the most practical | | | | total your leased vehicle (assuming your lease |
| advice from a personal finance perspective which | | | | provides gap insurance), the insurance would |
| is that you should do either if they involve a new | | | | cover your equity difference. If you financed the |
| car. A car loses 15% to 20% of its value the first | | | | vehicle, you would be required to pay the |
| year. This is a big hit that is better left for | | | | difference yourself. While this sounds like a big |
| someone else to take. With that being said, most | | | | advantage for leasing, take it with a grain of salt. |
| of you who know me can know call me a | | | | How often does one actually total their car and |
| hypocrite because I have not purchased a used | | | | use the gap insurance? My guess is not that |
| car since I was in college. There is nothing like | | | | often. While it is usually an advantage toward |
| pulling away from the dealership in a shiny new | | | | leasing, I wouldn't base my decision based on the |
| vehicle with the seductive new car smell. | | | | gap insurance. Although it is not common, there |
| Now that we have determined that you are | | | | are a few banks that offer gap insurance with |
| getting a new car against my advice, we can get | | | | traditional loans. |
| down to the details of whether you should lease it | | | | Taxes. If you are using the vehicle in your |
| or buy it. First, you must understand that the | | | | business, you can deduct a portion of the |
| basic premise of leasing is that it is simply another | | | | expenses related to it. The Internal Revenue |
| way to buy the vehicle. You are not renting the | | | | Code limits that amounts you can deduct then |
| vehicle from the manufacturer. Car dealers love | | | | you buy a vehicle through Luxury Automobile |
| leasing cars because it is very easy for them to | | | | depreciation limits. These limits vary depending on |
| tinker with the numbers and make a much higher | | | | how long the car has been in service, but range |
| profit. It is important that you, as the buyer, | | | | between $2,850 and $5,200 for the first three |
| understand how leases are calculated. | | | | years that the car is in service. With a lease, you |
| To better understand how leasing works, think of | | | | can deduct the full amount of your lease payment |
| a conventional loan. At the beginning of the loan, | | | | (based on your percentage of business use). This |
| you owe the purchase price (less any down | | | | deduction can be significantly larger than you can |
| payment, etc) of the vehicle. At the end of the | | | | deduct through a purchase. I recommend |
| loan, you owe nothing. A lease is very similar, | | | | consulting your tax advisor to determine if you |
| except at the end of the term, you owe the | | | | qualify and what your deductions may be. |
| residual value stated in the lease. At the end of | | | | Advantages to Buying |
| the lease, you must give them this value - either | | | | Long-term Cash. Long-term cash outlay is almost |
| by turning the car in or by paying them the | | | | always less with a purchase. This is true whether |
| residual value. When you think of the lease like | | | | you plan to purchase a new car every 3 years or |
| this, it is similar a purchase with a balloon payment | | | | every 10 years. If you plan to keep the vehicle |
| at the end of the term. | | | | an extended period of time, the cash outlay can |
| Almost all automobile leases today are closed end | | | | be considerably less by buying it. If you are the |
| leases, and that is what I will discuss here. If you | | | | type of person that wants to have a car that is |
| are considering a lease, be sure to confirm that it | | | | completely paid for with no payment, traditional |
| is a closed end lease before signing. In a | | | | financing is the option for you. It is the fastest |
| closed-end lease, the leasing company bares the | | | | route to eliminating a monthly payment. |
| risk of the depreciated value because the residual | | | | Miles. If you buy the car, you can put as many |
| value is set at the onset of the lease. If at the | | | | miles on it that you like. When you lease a vehicle, |
| end of the lease, the vehicle is worth more than | | | | you are limited in the number of miles that you |
| the preset value, you can still buy the vehicle for | | | | put on the vehicle. Approximately 10 percent of all |
| the preset residual value. If the vehicle is worth | | | | leasers exceed their mileage allowance and it is |
| less than the preset value, you have the option to | | | | not uncommon for leasers to exceed this |
| turn the car in and the leasing company takes the | | | | allowance by 5,000 miles per year. At 15 cents |
| hit for the difference. | | | | per mile, this can result in additional payments at |
| Advantages to Leasing: | | | | the end of the lease well in excess of $2,000. |
| Monthly Cash Flow. Leasing provides better | | | | There are many variables that can change related |
| monthly cash flow. If you are an individual that | | | | to your annual mileage. Be sure to examine them |
| likes the benefits of leveraging yourself and your | | | | before deciding to lease a vehicle. |
| investments, this can be advantageous. If you can | | | | Taxes. If you are using the vehicle in your |
| invest the monthly savings into an investment at | | | | business, you can deduct a portion of the |
| 15%, 20%, or even more, why would you tie up | | | | expenses related to it. Section 179 of the Internal |
| your funds when you are only saving 7% in | | | | Revenue Code allows qualifying businesses to |
| interest? That is also true when buying a vehicle | | | | deduct the full cost of equipment purchases in the |
| and paying cash. Why would someone tie up | | | | current year (up to $128,000 in 2008 including up |
| $35,000 in cash when they can earn much | | | | to $25,000 for qualifying automobiles). The catch |
| greater returns on that cash? With this being said, | | | | related to cars is that they are typically not |
| most people are not investing in things that | | | | considered equipment. For them to qualify, they |
| consistently give them these returns. In addition, | | | | must be at least 6,000 lbs of gross vehicle weight |
| ninety percent of the people that plan to use this | | | | (as determined by the manufacturer). If you are |
| leverage at the onset of the lease never do. | | | | searching for an SUV or truck that you will be |
| They end up spending the money on other | | | | using in your business, be sure to find out the |
| expenses that have no long-term value. If you | | | | weight and check with your tax advisor on |
| plan to use leverage, be sure to set it up | | | | whether or not your business qualifies. |
| immediately and stick to your plan. I do not | | | | Buy or Lease? |
| recommend this for most people because over | | | | As you can see, there are advantages and |
| ninety percent people do not have the will to stick | | | | disadvantages to both options. In addition, many |
| to the investment plan. If this is the case, they | | | | of the advantages or disadvantages do not apply |
| are better buying and saving the additional interest | | | | to all people. As a general rule of thumb, I believe |
| that they will have to pay. | | | | most people are better off buying the vehicle |
| Gap insurance. Most leases provide for gap | | | | because most people do not have the financial |
| insurance at no additional cost. Simply speaking, | | | | discipline to make good use of the monthly cash |
| gap insurance covers the difference between | | | | flow savings. As with any major decision, I would |
| what you owe on a vehicle and what it is worth. | | | | suggest contacting your tax and financial advisor |
| With little or no down payment, this gap will | | | | to help determine which is right for your situation. |
| usually exist whether you finance a vehicle | | | | |