Mindy Abramowitz, our resident accountant (who is uber-cool, by the way) answers the perplexing question:
Should I lease? Or should I buy?
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.
- 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
- 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.