In todays world, customers often face a dilemma about whether to buy or lease. Lease is an agreement in which one party gains a long term rental agreement, and the other party receives a form of secured long term debt. On the other hand, buying involves transfer of ownership from seller to buyer. Buying or leasing decision depends mostly on customers preference. There are many factors to consider before taking a buying or leasing decision. 2. Factors Influencing Buying vs. Leasing Decision:
Following are the factors a customer should consider before taking a buying or leasing decision.
3.1. Advantages of Leasing:
1. Low monthly payment: Monthly lease payments are 30-60% lower than purchase loan payments for the same item. 2. Little or no down payment: There is no down payment required for most lease contracts. But some promotional deals require a small down payment. 3. Limited liability: The customer only pays for the part he/she actually uses. For example, price of a car is $20,000 and expected price of the car is $13,000 after three years. If someone leases that car then he/she will pay only $7,000. 4. Tax: Customers pay tax only for the amount they use not for the entire value of the item. 5. Maintenance cost: Most people lease for a term that matches with the manufacturing warranty for that item, so that they do not have to pay maintenance cost. 6. Flexibility: Customers have the flexibility to use latest products. For example, if a customer leases a car for 3 years, then after 3 years he/she can lease the latest car available. 7. Gap Coverage: Most automobile leases include gap coverage. So customers are better protected in lease in case of stolen items.
3.2. Disadvantages of Leasing:
1. Early termination cost: If a customer terminates lease before end of the contract, then termination cost is usually very high. 2. No ownership equity: One of the biggest disadvantages of lease is that customers pay without getting any ownership in the item. 3. Excessive mileage charges: In case of automobile leasing, there is a penalty for excessive mileage. So the customers dont have the freedom to as much as they like. 4. Penalties: If the condition of the leased product is not up to standard then customers have to pay penalties. For example: If a customer returns a leased vehicle at lease-end with excessive dents, scratches, or unrepaired accident damage, he/she will be charged. 5. Customization: Customers cannot do any customization of the leased product. For example, many people like to customize their car, but if it is a leased car than they cannot customize it. 6. Credit Requirement: Getting a loan to purchase is often easier than getting a lease. 7. Insurance: Often insurance premium on a leased item is more than for a purchased item. For example, insurance premium on purchased cars is less than insurance premium on leased cars.
3.3. Advantages of Buying:
1. Ownership: The biggest advantage of buying is ownership. For example, when someone buys a car than he/she has the ownership of the car. 2. Customization: Customers can do whatever customization they like. For example, a customer can modify his car the way he likes. 3. Flexibility: Buying a product gives the right to use that product anyway he/she wants to use. For example, when someone buys a car, there is no mileage restriction. 4. Resale: Buying a product gives the customer right to sale it anytime. So customers can sell their products and get some resale value. 5. Income: People do not required to have a stable income to buy. For example, I am a student so I dont have stable income but I can still buy a car if I have the money to buy it. 6. Insurance: insurance premium on a purchased item is less than for a leased item. 7. Long term cost: Long term cost of purchased products is less than for leased products. A customer can use a product for many years so the long term cost is less.
3.4. Disadvantage of Buying:
1. Down payment: For purchase loans usually customers are required to make a big down payment. 2. Monthly payments: Monthly payments for purchase loans are higher than for lease. 3. Depreciation: The moment a product is sold it is considered as used product and price of the product is less. There are some exceptions to this rule as land; gold etc. usually appreciates over time. For other products customers are actually buying products that will depreciate over time. 4. Maintenance: Maintenance cost is high for purchased products as after manufacturing warranty runs out customers need to pay maintenance cost. 5. Technology: In todays world technology changes rapidly.
By buying a product a customer is stuck with that product or need to sell that product at depreciated price to get latest product. 6. Life plans: Buying may be disadvantageous to people who are expecting changes in their life. For example, from a single professional someone can become a parent of three in 3 years. So for him/her selling a compact car after three years and replacing it with minivan is would be more expensive then leasing the first car and simple returning it. 7. Hassle of disposing: For purchased products a customer needs to take the hassle of selling or recycling it.
3. Lease vs. Buy Scenario:
Now I am going to compare between buying a car vs. leasing a car. For this purpose I am assuming the customer is going to take a purchase loan. Another assumption is that the customer is going to buy a $23000 car. Now I am going to compare lease with 0% and 6% loan for the same length. Table: Lease vs. Loan
| Lease- 6%| Loan 0%| Loan 6%|
Car Price| $23000| $23000| $23000|
Down Payment| $1000| $1000| $1000|
Interest Rate| 6%| 0%| 6%|
Residual| $11000| n/a| n/a|
Months| 36| 36| 36|
Payment| $388.06| $611.11| $669.28|
From table 1.1 we can see that the price of the car is $23000. Down payment is also same for lease and loan which is $1000. We can also see that lease monthly payment is much less than 0% and 6% loan. But monthly payment alone should not be considered when deciding buying or leasing a car. Buying or leasing decision depends on the customers preference. In the above chart monthly payment is much less for lease but no ownership is involved in this option. In loan options, after three years customer actually become the owner of the car. Many prefer to own a car rather than leasing it.
To conclude I would like to say buying or leasing decision depends mostly on peoples preference that means which factors are more preferred or most important to the customer. Some people prefer ownership above all other factors and some people prefer to use latest products. I would always prefer leasing over buying because of the opportunity to use latest products, its attractive monthly payments, limited liability. Technology changes rapidly. For example a latest laptop becomes outdated within two years; a latest car becomes outdated in 3-5 years. So leasing is a much better option for using latest products. Another thing is monthly a payment of lease is much lower than buying. Moreover in case of lease the customer is only paying for the amount he/she is using. So in my opinion leasing is a better option than buying.
[ 1 ]. A type of auto insurance to protect car owners against losses that can arise when the amount of compensation received from a total loss does not fully cover the amount the insured owes on the vehicles financing or lease agreement. [ 2 ]. Standards established by creditors that must be satisfied by potential debtors in order for credit to be given.