A car of any kind is the perfect example of a depreciating vehicle. It starts to drop off in value the minute the car leaves the dealership. The most given out piece of advice is that small businesses should ALWAYS lease their company vehicle. While leasing has many benefits, it is not such a simple decision.
Why is the lease recommended?
The lease has one big advantage. The lease payment is a tax deductible expense. However many tax authorities give a one of huge depreciation write-off in the year of purchase, so if you are in region with the one-off depreciation write off available then buying may be a better option.
However the problem with buying is that the car loses value the minute it is out of the dealership. The benefit with the lease is that in a few years you can return it to the dealership and grab a new one instead.
Many people argue that a lease leads you to pay out every month and over the term you might end up paying quite an amount. The pay-out point is very true, but not many businesses can come up with huge sums of money to make an outright purchase. However there are leases with the buy option built in. The buy option allows the business to buy the car at the end of the lease by paying its “residual value”. The residual value is what the dealer estimates the car is now worth. This option is particularly useful is you are going to purchase heavy machinery which is quite expensive but still an asset that a business needs for the long-term.
Why buy outright?
Leasing has its benefits and so does buying outright. However when we talk about buying, we are talking about buying a new vehicle. Also when buying it is not necessary you go the route of buying brand new. Many businesses opt to buy second hand vehicles for they can be obtained at competitive prices. Though second-hand vehicles may have a slightly high maintenance cost attached to them.
Buying is a good option when you have decided that you are going to keep the vehicle for quite a long time. If you have the cash you are in luck, but if not then you have the option of taking out a loan and putting it towards the purchase of the vehicle. Many dealers will also help in arranging the necessary finance.
Buying is also a good option if your business vehicle is going to have a huge mileage. Anything above 10,000 to 15,000 miles and you will have to pay a mileage penalty. A lease has a maximum number of miles that you can drive in a year. Also if the vehicle is used too sparingly, you are not making the full use of the “rent” you are giving out in the term of lease payments.
Also it is seldom discussed but under a normal lease agreement if the vehicle gets stolen then your insurance will only reimburse the amount they set as the vehicle’s market value which might not the amount due on the lease. This means that even after getting an insurance claim you have to pay out of your own pocket. Buying a car does solve this problem or if you are going for a lease, then get “gap coverage”. Gap coverage is extra insurance to cover against such a thing. It may costs more but is worth it.
Shawn Stevenson is a passionate blogger and an avid luxury car lover currently associated with Alfa Romeo Central Florida, dealers of luxury cars in Orlando Central Florida. For more updates follow him on twitter and facebook.