The Decision To Buy Or Lease Cars
It’s the classic dilemma that faces every auto-consumer. Pay cash upfront or forgo the ownership and pay monthly settlements instead? Buy or lease for a new set of wheels? As is the case with every other common dilemma, there is right answer. Each option has its own benefits and drawbacks, and it all depends on a set of financial and personal considerations.
First, your finances. Affordability is clearly key, and you need to ask the question of how stable is your job and how healthy is your general financial situation. The short-term monthly cost of leasing is significantly lower than the monthly payments when buying: you only pay for the portion of the vehicle’s cost that you use up during the time you drive it.
If you have a lot of cash upfront, then you can opt to pay the down payment, sales taxes – in cash or rolled into a loan – and the interest rate determined by your loan company. Buying effectively gives you ownership of the car and that feeling of “free driving” that goes on providing transportation. If you want to get into luxury models but can’t afford the upfront cash of purchasing the vehicle than you’re a good candidate for leasing. Unlike buying, it gives you the option of not having to fork out the down payment upfront, leaving you to pay a lower money factor that is generally similar to the interest rate on a financing loan. However, these benefits have a price: terminating a lease early or defaulting on your monthly lease payments will result in stiff financial penalties and can ruin your credit. You need to make sure you carve out the monthly lease payment in your budget for the foreseeable future, at least for the duration of the lease.
Besides the financial aspect, making a buy or lease decision depends on your own particular lifestyle choices and preferences. Think about what the car means to you: are you the sort of person to bond with the car or would you rather have the excitement of something new? If you want to drive a car for more than fives years, negotiate carefully and buy the car you like. If, on the other hand, you don’t like the idea of ownership and prefer to drive a new car every two to three years then you should lease.
Next, factor your transportation needs: How many miles do you drive a year? How properly do you maintain your cars? If your answer is: “I drive 40,000 miles a year and I don’t really care much about my cars as I don’t mind dealing with repair bills”, then you’re probably better off buying. Leasing is based on the assumption of limited-mileage, usually no more than 12,000 to 15,000 miles a year, and wear-and-tear considerations. Unless you can keep within the prescribed mileage limits and keep the car in a good condition at the end of your lease, you might incur hefty end-of-lease costs.
Company Cars and Capital Allowance
From April 2009 it has been announced that there are new rules regarding tax relief on business cars. This could make a difference to the capital allowances so it may be more practical to change your car sooner than you had anticipated.
This Pre-Budget report shows allowances for cars are based on the vehicles carbon dioxide emissions. The ones mainly affected will be those that were acquired after the 31st March 2009 for companies and for sole traders and partnerships this will apply after 5th April 09.
After April it will only be cars with co2 emissions that are up to 160g/km that will attract allowances at just 10%. Therefore buy a vehicle before April and keep the higher rate of relief.
It is thought that perhaps even the more upmarket cars with emissions up to 160 g/km may be a better proposition to buy now. At the present time if you are contemplating buying a car which costs more than £12,000 writing down allowances will be compressed to £3,000 a year. You are entitled to a balancing allowance when you get rid of it. Ultimately the entire capital cost of the vehicle is allowed for tax in its lifetime.
These new rules will remove the £3,000 limit plus the allowance. In the case of the expensive car which usually loses its value much quicker than the rate of capital allowances, this will mean that there could well be a shortfall in allowances as in comparison to the cost of the car in its lifetime.
Under these new rules it appears that businesses that lease cars that are expensive should indeed benefit. The restriction on tax relief on lease rentals for cars exceeding £12,000 will be replaced by 15% disallowance of lease rental payments on cars with co2 emissions that are above 160g/km. This will be regardless of their cost.
