Shelling out a significant amount of money for a rapidly depreciating asset can sometimes not make sense when it’s laid out black and white. Leasing, renting a car from a dealer over a set period of time, is an affordable and economic solution.
The advantages of leasing
Leasing a car is a popular way of financing the purchase of a new and seems similar to a hire purchase agreement; however there are some important differences between leasing and buying. We’ll explore some of them below.
You can save money over purchasing outright and not owning the car
This is one of the main worries about leasing: You’ll have no equity invested in your lease car. However, but because cars depreciate, this is actually economically sound. Having equity tied up in the car really puts you at a financial disadvantage.
By leasing, you may be able to drive away in a car that you wouldn’t be able to purchase outright at a lower cost. This is due to the way car leasing works as the lease payments are only based on a percentage of the car’s cash price rather than the full new price of a vehicle.
Here’s an example, on a £20,000 car, traditionally you’d have to finance the whole £20,000 price tag with a personal car loan. With a vehicle lease, you merely pay the change in value between the car’s purchase price and what it’s expected to be valued at at the end of the lease agreement.
Therefore, if the car’s residual worth is only 60% of the purchase price after 3 years; you’ll only have to pay £8,000 (the 40% depreciation) over the lease period assuming the car would be valued at £12,000 when the lease contract ends.
This can be a great way to reduce costs, especially if you intend to sell your vehicle after a few years. Any resale hassle is taken away and you can effectively calculate how much you will need to pay each month.
You’re able to upgrade your vehicle regularly
If you’re the type of person who wants the latest model of car every few years, then leasing is the right way forward. No resale hassle and the benefit of regular monthly payments mean that you can effectively calculate your outgoings and budget accordingly.
There is a flipside of this argument, if you do not wish to upgrade your car on a regular basis then it may not be economic to lease. If you see yourself in the same car for more than five years, it may be beneficial to look at a contract purchase deal where you have the option to buy the vehicle.
However, manufacturer warranties, safety, fuel efficiency and reliability all come hand-in-hand with a new vehicle, so you will not have to worry about any of these issues during your lease period.
For low mileage drivers, leasing can be very cost effective
Leasing a car usually comes with a stipulation on the contract that you do not exceed a certain amount of miles per year. This is because the more you drive, the faster the vehicle will depreciate and the resale value of the car will need to be recalculated.
If your lifestyle entails significant driving and you think you will exceed the standard mileage limit, this can be negotiated in your contract
If you’re unsure of the future then you have the freedom to change
As mentioned before, even if you’re not interested in the latest model of your favourite brand, changing lifestyles can affect what you’ll need to drive. If you have a growing family, have a change in job or change in lifestyle habits, a new vehicle may be needed. You can rest assured that the reliable constant will be the monthly payments, so whatever happens, you won’t have to worry about financing the car.
With leasing, you’ll be able to upgrade or change with ease at the end of your contract period with no resale hassle..
If you lease a car for business use, your payments are tax deductible
If you’re looking for a vehicle for business use and plan on deducting some of your car’s depreciation from taxes, leasing will allow you to deduct far more than if you buy outright. This is because interest paid on a car loan is not deductible, however leasing is. You will be able to deduct depreciation plus the financing costs, depending on your vehicle type.
Again, an added benefit is that there is no significant upfront cost compared to purchasing. So if you’re thinking about leasing a car, hopefully you’ll have a better idea as to what a lease can offer you compared to purchasing via a loan or outright. As mentioned, each lease depends on your lifestyle, so it is best to check which vehicle or type of lease contract will suit you best.