Is It Better to Buy or Lease?

Have you ever made any big ticket purchases before (eg. cars, property, etc)?

Before you spent your money, did you ever considered leasing (or renting) instead of buying?

Leasing is often considered because it is cheaper in the short run, if an individual cannot afford to buy the car or home.

Another reason is the convenience that it brings, because you have the option to rent another car or property after the lease has expired.

So which is the better option? Leasing or buying? Let us compare the advantages and disadvantages.

Advantages of Leasing

1. Lower monthly payments – The individual only pays for the use of the asset for a specific period. Therefore the monthly payments are usually lower, compared to a purchase loan.

2. Less up-front cash deposit – Leases require less, or sometimes no down payment.

3. Fewer maintenance problems – Usually, the landlord or leasing company will cover the costs of major repairs and maintenance caused by wear and tear.

4. Opportunity to acquire financing – If an individual is a first time buyer or has bad credit rating, sometimes leasing is the only way an individual may be able to acquire financing for his needs.

5. More choices available – An individual may take advantage of the choices available, for example, he may change the model of his leased car every few years or he may decide to relocate his residance every few years.

6. Less hassle – At the end of a lease, there is no hassle trying to get rid of a used car, for example. An individual can just return the car and walk away.

Disadvantages of Leasing

1. Long-term cost of leasing is more than the cost of buying – A lessee may find that it more cost effective to purchase the asset from the start, as his total outlay at the end of the leasing period may be cost more than he expected.

2. High insurance costs – Sometimes the lessor requires the lessee to take out insurance policies to cover himself.

3. Excess wear and tear clauses – For example, car rental companies may be very particular about the conditions of the car when the lessee returns it at the end of the lease period. If the condition is poor, the lessor may keep the “refundable security deposit” to offset the costs of repair. This may also apply when leasing a home.

4. Accidents may trigger early termination (particularly for car leasing) – Car lease may be terminated if an accident occurs, in which the lessee may be obliged to pay off the lease. Car insurance covers the damages, but not the cost of paying off the lease.

5. Penalty for getting out of the lease early – There may be a penalty for getting out of a lease early. A lease is a contract and if it is broken, there are penalties for breach of contract. The lessee’s credit rating may be tainted, causing him to perhaps, pay more for future loans at higher interest.

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