Should I buy my car or lease it?

If you buy your car or lease it? This is a question we often hear, and as usual, the answer is "it depends". It 's also a response that I could compose a whole book about.

First of all, let me start with the more practical advice in terms of personal finance, which is that you should do or if they involve a new car. A machine loses 15% to 20% of its value of the first year. This is a great success that it is better to let someone else to take. With that being said, most of you who know me can know call me a hypocrite because I did not buy a used car since I was in college. There is nothing like pulling away from the dealership in a brand new vehicle with the seductive new car smell.

Now that we've established that you are getting a new car against my advice, we can get the details if you should rent or buy. First, one must understand the basic premise is that the lease is simply another way of acquiring the vehicle. You are not renting the vehicle from the manufacturer. Car dealers love leasing because it is very easy for them to tinker with the numbers and make a profit much higher. It 's important that you as the buyer, understand how leases are calculated.

To better understand how leasing works, think of a conventional loan. At the beginning of the loan, you must purchase price (less any payments, etc) of the vehicle. At the end of the loan, I owe you nothing. The lease is very similar, except at the end of the term, was responsible for the residual value stated in the lease. At the end of the lease, you must give them this value - either by turning the machine or paying them their residual value. When you think of this as a lease, is similar to a purchase with a balloon payment at the end of the term.

Almost all leases of automobiles today are closed end leases, and that's what I would like to discuss here. If you are considering a lease, be sure to confirm that it is a closed end lease before signing. In a closed-end lease, the leasing company bares the risk of the depreciated value because the residual value is fixed at the onset of the lease. If at the end of the lease, the vehicle is worth more than the preset value, you can still buy the vehicle for the residual value preset. If the vehicle is worth less than the predetermined value, it has the ability to turn the machine and the leasing company takes the hit for the difference.

Advantages to Leasing:

Monthly cash flow. Leasing provides a better cash flow monthly. If you are someone who loves the benefits of leveraging yourself and your investment, this can be advantageous. If you can invest the monthly savings in an investment at 15%, 20%, or even more, because they bind the funds when you are saving only 7% interest? This also applies when you buy a vehicle and paying in cash. Why would anyone tie $ 35,000 in cash when they can get much higher returns on that money? With that being said, most people are not investing in things that give them these returns consistently. Furthermore, it is never ninety percent of people who intend to use this lever at the onset of the lease do. They end up spending the money for other expenses that do not have long-term value. If you plan to use the lever, make sure you set immediately and comply with your plan. I do not recommend this for most people, because more than 90 percent people are unwilling to adhere to the investment plan. If this is the case, they are best to buy and save the greatest interest that will have to pay.

Gap insurance. Most leases include gap insurance at no additional cost. In simple terms, the gap insurance covers the difference between what you owe on a vehicle and what it's worth. With little or no down payment, this gap usually found if a conventional vehicle finance or lease - even if the gap is usually greater when the lease because a smaller portion of your monthly payment goes toward reducing the balance funded. If you are in an accident and total the leased vehicle (assuming that the lease includes gap insurance), insurance would cover the difference in your net worth. If you financed the vehicle, you would pay the difference yourself. Although this sounds like a great advantage for the lease, take with a grain of salt. How many times the actual total your car and use the gap insurance? My guess is not that often. While it is usually an advantage for leasing, I would not base my decision based on the insurance gap. Although not common, there are some banks that offer insurance gap with traditional loans.

Taxes. If you use your vehicle in your company, you can deduct a portion of expenses related to it. The Internal Revenue Code limits the amounts you can deduct then you buy a vehicle through the limits of a luxury car depreciation. These limits vary depending on how long the machine is in service, but between $ 2,850 and $ 5,200 for the first three years that the car is in service. With a lease, you can deduct the full amount of the rent (based on the percentage of business use). This deduction can be significantly larger than what can be gathered with a purchase. I recommend that you consult your tax advisor to determine if you qualify and what could be your deductions.

Benefits for purchase

A long-term cash. A long-term cash outlay is almost always less with a purchase. This is true if you intend to buy a new car every 3 years or every 10 years. If the vehicle is expected to maintain a long period of time, the cash outlay can be considerably less to buy it. If you are the type of person who wants a car that is paid in full with no payment, traditional financing is an option for you. It 's the fastest way to eliminate a monthly payment.

Miles. If you buy a car, you can put as many miles on it that you like. When you lease a vehicle, you are limited in the number of miles you put on the vehicle. About 10 percent of all tenants exceed their mileage allowance, and it is not uncommon for tenants to exceed the allowance of 5,000 miles per year. At 15 cents per kilometer, this may result in additional payments at the end of the lease well in excess of $ 2,000. There are many variables that can change in relation to annual mileage. Be sure to examine them before deciding to rent a vehicle.

Taxes. If you use your vehicle in your company, you can deduct a portion of expenses related to it. Section 179 of the Internal Revenue Code allows qualifying businesses to deduct the entire cost of purchasing equipment in the current year (up to $ 128,000 in 2008, including up to $ 25,000 for qualifying cars). The catch is related to cars that are not generally considered equipment. For them to qualify, must be at least 6,000 pounds gross vehicle weight (as determined by the manufacturer). If you are looking for an SUV or truck that you plan to use in your business, be sure to find the weight and check with your tax advisor whether your business qualifies.

Buy or rent?

As you can see, there are advantages and disadvantages of both options. In addition, many of the advantages or disadvantages do not apply to all persons. As a general rule, I think most people are better off buying the vehicle because most people do not have the financial discipline to make good use of monthly cash flow savings. As with any important decision, I would suggest you contact your financial advisor and tax to determine what is right for your situation.

(C) 2008 Bordeaux and Bordeaux, CPA, PA

Request from the U.S. Treasury Department Circular 230 Disclosure: Any advice on writing one or more federal tax issues arising from a plan subject, or agreement concluded with a confidence level of "more likely than not" (ie, more than 50% probability) that the subject of consultation would be resolved in favor of the taxpayer if challenged by the IRS, and the main or significant matter is the avoidance or evasion of a tax imposed by the Internal Revenue Code ( IRC). The recommendations in this article is not intended or written to be used, and can not be used by any other person or entity for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any applicable state law or local tax. ......