Difference Between Lease and Buy

Signing A lease

The Difference between Leasing and Buying
When faced with a purchase decision—like deciding what kind of car or appliance to buy—consumers have the option to either pay cash up front or borrow the total amount of money and then purchase the item. While these two options involve paying the total value of the item at the time of purchase, a third option is also getting very popular with consumers: leasing the item. In the case of a lease, the lessee gets the possession immediately by paying a down payment and then pays monthly installments as per the lease agreement or until the total value of the item has been paid off. Technically, the lessor owns the item until the total amount is cleared, but the possession remains with the lessee from the beginning.

How Leasing Leads to Higher Priced Models
In a lease, the buyer must pay the down payment up front, while the larger part of the cost is paid in the later years as installments. Since the lessee is able to defer the majority of the cost until later, the process of leasing affects the lessee’s purchasing decision. When paying the total cost of an item up front, the buyer’s decision is based on those items within their price range. In the case of a lease, the lessee is tempted to shop for a higher price model because the amount to be paid is for the down payment only and the rest will be paid monthly in installments. With the availability of leasing, consumers tend to upscale their purchases, leasing higher priced models than the more affordable ones they would have bought if leasing was not an option. Thus, leasing increases the number of purchases of premium models and affects the quality of life.

The Difference between Leasing and Financing
There are various similarities between leasing and financing and some differences as well. In the case of financing, the amount borrowed is the total price of the item minus the down payment or the trade-in value of the item. Thus, the buyer is financing this entire portion of the actual cost of the car. Leasing functions quite differently. The lessee basically ‘finances’ only the depreciation of the vehicle or any other item over a certain period, which is called the leasing period. It could be three or five years. The other cost that occurs is the fee of the processing involved. After the leasing period, the lessee simply returns the vehicle or the item to the lessor and the entire leasing process comes to an end. The lease’s monthly installment would probably be less than that of a loan, thus making a lease appear to be the far more appealing option. Over the entire leasing period, the lessee pays only the price of the equipment, appliance, or vehicle minus its leftover or residual value at the end of the leasing period. ¹

Pros and Cons of Leasing and Buying
Based on the information presented thus far, one might be tempted to believe that leasing is always the better option. However, that is not always the case. Whether one should lease or buy depends on the specific situation. Leasing might not be a good option for those whose credit rating is not adequate or whose incomes fluctuate from month to month. Others might not have enough income to qualify for a lease. There might be some non-income-based or credit-related restrictions as well. In the case of cars, for example, leasing might only be available for new cars, though many car dealers also offer leases for used cars.

Leasing or Buying a Car
The prospective lessee or buyer needs to consider many different aspects before arriving at a decision to either buy or lease a car. A choice must be made about the different levels of responsibilities associated with buying or leasing. If one leases a vehicle, there are fewer responsibilities for taking care of the car and getting it repaired. Some people like the idea of owning things and thus would not want to lease. Therefore, it is important to know beforehand whether it is more important for you to own something and pay higher monthly installments for it or just give up on ownership and pay lower monthly installments. The personal propensity towards being a good caretaker of vehicles comes into play here as well. Some people love to take care of their cars and go out of their way to keep them shiny and fully functional all the time. For such people, perhaps a ‘buy’ decision would be better off. Leasing is more suited for those who long for benefits, but do not necessarily develop a certain relationship or attachment to a specific car. For them, the benefits of safety, comfort, mileage, and driving pleasure are more important than the make or model of the car, and, thus, the option of leasing is certainly preferable. In the case of a lease, however, depending on which state you live in, sales tax is applicable to monthly installments along with a money factor (a financial rate that is similar in form to an interest rate). While the vehicle can be returned to the lessor at the end of the leasing period, it is also possible to purchase the vehicle from the lessee at the end of this period by paying the residual value of the vehicle at the end of the contract period. Thus, any possible attachment developed with the vehicle during the time of its use can be preserved and prolonged by this purchase option. ²

At a glance, the decision of whether to lease or buy a car involves considering one’s preferences about the following: ownership status, low or high monthly payments, whether early or late termination of contract is desired, whether returning the vehicle is a viable option or not, whether any equity in the vehicle is desired or not, whether one can live with the mileage limit often placed on leased cars, whether one can arrange to finance another vehicle after the lease on the first one is finished, whether a purchased car would be better because it would provide the residual value equity at the end of the contract period, or, last but not least, if you are the type who likes to get your vehicle modified. If the answer is ‘yes’ to the last question, then a buy decision would be better because most lessors will not allow the lessee to make any modifications to the vehicle. If some additions were made during the contract period, these would need to be removed from the vehicle, and, if any damages are caused because of this removal processes, then the lessee would be required to bear the costs incurred. ³

Leasing or Buying a Home
In the case of homes, home ownership and leasing decisions are also dependent on individual circumstances. When a person buys a home, they feel permanently connected to their community. Moreover, the owner is free to make modifications to the home without any regulations. A part of mortgage payments is even deductible from federal taxes, and, during boom times when home prices go up, the owner can make a substantial profit upon selling it. Leasing, on the other hand, allows the lessee to move from one house to another if he or she needs to, perhaps for a career-oriented relocation, to move to a bigger or smaller house, or a house with more amenities. Also, the maintenance issues are no bother to a lessee, unlike homeowners who must take care of their homes themselves. Home insurance and property-related taxes are already included in monthly lease payments, minimizing the number of payments a lessee has to make. When advising clients, some banks use a simple rule: a home buyer should not buy a home worth more than 3 times their annual income. ⁴ However, the decision is not always that simple and must depend on the person’s individual circumstances. Each option must be considered thoroughly before making a decision that has such a long-time effect on one’s life.

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