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Mindy Abramowitz, our resident accountant (who is uber-cool, by the way) answers the perplexing question:

Should I lease?  Or should I buy?


red-convertible.jpgHere’s another question best answered, “It depends.”

People usually are talking about a car, but a discussion of the lease vs. buy dilemma applies to a wide variety of items: computers, equipment, even buildings.

Why lease?

  • Lower monthly payments
  • No down payment (depending on the lease)
  • Sales taxes are included in the monthly payment, so you don’t have to pay them up front
  • Easier to keep your equipment up-to-date because you can acquire a newer model at the end of the lease
  • Depreciation is not your concern (though it is factored into the lease cost)
  • Greater tax deduction if you use the item for business

Why buy?

  • The item is yours. You can customize it as you see fit.
  • It’s easier – there’s less paperwork and fewer terms to negotiate.
  • It’s up to you whether you repair it – you are not legally bound to maintain your vehicle or equipment.
  • No restrictions on use (mileage limits, etc.)
  • You can sell the item for cash.
  • Over the long term the cost is usually lower

How to compare:

  • Many leases present the cost of leasing right in the agreement, but if yours doesn’t, use an online lease-or-buy calculator to figure out how much the lease costs so you can compare it to the cost of purchasing.
  • The cost of purchasing is either your loan interest if you are financing the purchase, or, if you intend to buy outright, the after-tax return your cash would earn in an investment . If your interest is tax deductible (i.e. you are operating a business), then use the before-tax return on your investments.
  • If the lease term differs from the loan term, make sure you compare the annual or monthly cost of each.

I am ignoring the effect of down payments, sales taxes and other fees for the sake of simplicity, but if you need a more detailed cost analysis I encourage you to try a lease-or-buy calculator.

About the Author

Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com

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