Wondering if you should buy or lease a car? Trying to decide if a car lease is better, than buying a car? In this video, I breakdown the difference between a car lease, finance and the outright purchase of the car.
This financial decision comes down to your lifestyle and preferences.
Buying A Car:
When it comes to buying a car, you can buy a brand new or used car, depending on your situation. In the event, you are not paying for it in full cash, you will be financing it. When you finance the car, you place a down payment based on the purchase price. Then, this down payment will be subtracted from the purchase price and you are getting a loan for the rest of the amount over a specified period of time at a specified interest rate. Another cost you can expect when buying a car is sales tax! For me, here in Ontario it’s 13%, which is expensive!! Other provinces and even states can see higher or lower sales tax, depending on your location.
After you factor all of this in and you pay off the car loan within the specified term, you now will own the car outright!
In the event you want to sell the car before your car loan payment is fulfilled, your proceeds will be whatever the car is worth minus what you own as a loan.
If you are planning on keeping the car for 5 years or more it makes more sense to buy it. Also if you are buying a car that holds their value, it may be better to buy a car! Say if you were to buy a car for $40,000, drive it for a year and put on 20k onto and a year later it’s worth $35,000 and sold it, you incurred $5,000 for the year to drive that car ($416.67). However if you leased this same car and the payments were $650/month which is $7,8000 annually, in this case it was cheaper to own the car for that year.
However there are a few drawbacks: you are responsible for maintenance of the car, you incur higher sales tax and higher payments monthly (when financing the car).
Leasing A Car:
Leasing a car works best when you want to have a new car every few years and generally want to have the lowest monthly payment possible.
Your monthly lease price is determined by the depreciation the car will see from you driving it over a certain term and the amount of mileage you put on it. There will be additional fees, in order for the dealership to also make some money. So you are paying a monthly price for the depreciation of the car instead of the total purchase price!
When leasing a car, it is usually a fixed term, typically between 24-48 months and during that time you have allotted miles or kilometers that you can drive the vehicle. If you drive in excess of these fees, you will be charged per mile or kilometer excess. Typically about 55 cents/kilometer here in Canada and about 20-25 cents in the US. So an extra 5000 Kms would mean and extra $2,750 you need to pay! This is something to consider, if you are someone who puts on a lot of mileage.
But if you were to buy the car, you can drive it as many kilometers without any restrictions. However, the more mileage you put on the car, the value depreciates and it’s worth less.
Often maintenance is included with the lease, therefore you won’t incur the additional costs of repair and maintenance or even the headaches regarding car troubles when it comes with owning a car. Also if you are looking at luxury cars where maintenance costs tend to get very expensive, leasing might be better.
If you’re using the car for business, you can write off the majority of your lease cost for business which is also helpful. The lease payment is a monthly recurring cost that can be written as a business expense, providing you with tax benefits. In the event you buy a car, it is seen as a purchase of an asset and not much can be written off. The yearly depreciation of the car can be claimed.
BUT once the lease is up, you have nothing to show for it! You don’t have equity in the car, you don’t own the car. Unless you end up buying it at the end of the lease, you have nothing left.
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