There are really only two options to consider for that new vehicle.
With all of the new safety features, gizmos and gadgets, the cost of vehicle ownership has been on the rise in recent years. Also on the rise is the willingness of buyers to lease rather than pay for their purchase outright. So what is the difference you say?
Two Variables to Consider
The first variable is the purchase price. There is a lot of product on the market and advertising galore so this task shouldn’t be particularly difficult. Don’t forget, when you are purchasing a vehicle outright, PST and GST must be paid upfront.
Once you’ve satisfied this part of the equation, you’ll need to figure out how you're going to pay for the deal you’ve struck. Most bank loans require a down payment of 10% to 20% with amortization periods ranging from three to five years. At the end of the period, the vehicle is paid for and it’s all yours. Therein lies the advantage of purchasing a vehicle outright - a lower overall cost. There is, however, a price to be paid. Purchasing a vehicle will cause a substantial impact on your monthly cash flow due to higher monthly payments.
Determining the cost of leasing a vehicle is complicated when compared to buying due to the number of variables involved: the purchase price, down payment, residual value, lease term, interest rate and the monthly payment. Fortunately, in B.C. we have the strongest lease disclosure rules in the country and all important lease figures must be disclosed in the lease contract. This ensures that the buyer receives all of the relevant information to assess “the deal” but it doesn’t eliminate the need for the buyer to do their homework.
The big advantage to leasing a vehicle is found in the size of the monthly payment. In comparing lease payments to payments under a bank financing arrangement, you’ll notice that lease payments are always lower. There is a logical explanation for this.
Think of a lease arrangement as effectively two separate loans. The first loan is equal to the difference between the purchase price of the vehicle and its residual value (that is the buy-out option). This loan will be paid off in its entirety at the end of the lease term. In other words, each payment on this loan is comprised of both interest and principal.
The second loan is equal to the residual value of the vehicle. On this loan you will be paying interest only. Since there will be no repayment of principal during the life of the lease, the monthly lease payment must be lower than the bank financing option.
Astute readers will notice that a low monthly payment is not necessarily indicative of a good deal; a low lease payment may simply be a function of a high residual value. The point is, buyers need to understand how leases work if they are to make meaningful comparisons.
If you're a “number person” and you own a computer with internet access, you may want to check out http://www.carcalculator.com. which markets Windows software designed to tell you all you’ll ever need to know about the purchase vs. lease decision.
Jim Maroney is a chartered accountant with Andres, Brown, Maroney in Maple Ridge.
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