Lease: Pros and Cons
Pros and Cons of Lease vs Loans
The key feature of a lease is that it provides a way for you to use property, but without buying it outright.
The main advantages of this for you are outlined below (we'll use the example of a car lease, for illustration):
- A lease can work out cheaper than a loan (in the short term, at least, though perhaps not in the longer term) because
- There is only a small down-payment to make, rather than a large deposit
- The monthly cost is usually lower than outright purchase (though not necessarily: you can keep loan monthly payments low either by choosing a "balloon payment" loan, or having a flexible loan spread over a long period of time, such as 5 or 7 years).
- There is no "resale" problem at the end of the lease period. The finance company has to sell the car, so they incur any inconvenience or risk in doing so, and they gain or lose from any market fluctuations in the value of the property.
- If you are a business, you may be able to reclaim VAT, or a proportion of it, on certain types of lease (your accountant will be able to advise of the impact on your bottom line)
The main disadvantages are:
- You have no "asset value" in the property. If you buy a car using a loan (and assuming the loan is secured on the car), then when the loan has expired you can sell the car or use it as a trade-in when buying another one. The amount of money you get for selling it, or when trading-in, is your 'asset value'. However, with a lease you simply hand the car back to the finance company, for which you get no money.
- In the long term, a lease could prove more expensive than a loan, but this depends on many factors such as when you decide to replace the car, the market value, etc..
- You often have more limited flexibility. For example, if you have a flexible loan then you can choose to sell the car and use the proceeds to pay off the loan. With a lease you are usually committed to making monthly payments for the period of the lease, and it can be expensive to change that arrangement.
- You don't see the benefit of any work you do to improve the value of the property, but you may be penalised if you reduce its value. For example, if you do a low mileage in a lease car, thereby increasing the resale value, it is the finance company who gets the benefit of the extra value. But the lease will probably require you to pay them for any mileage you do over a certain amount, thereby reducing its value.
When to Lease rather than Borrow
Whether to Lease or Purchase is a complex question, and involves a detailed assessment of your circumstances and requirements, the property you wish to acquire, and the offers that are available. For example, if you need a car and...
- do a low annual mileage
- have little or no cash
- want to replace it in a relatively short time (say 2 or 3 years)
...then a lease may be suitable. However, if you...
- want to modify your car (eg: by fitting an expensive hi-fi)
- want flexibility to get rid of the financial liability, eg: by selling it, if your financial circumstances worsen
- would like the option of keeping the car for a longer period of time
...then a (flexible) loan might be more appropriate.
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