Leasing vs. Buying a Car

Choosing between leasing and buying a car is a decision that confronts people with limited resources to spare. Business firms usually prefer leasing cars on account of tax benefits. People who can finance their purchase, by availing a car loan at a low rate of interest, generally prefer buying a car. For others, the following factors may help them decide on the best course of action.

Leasing vs. Buying a Car
Exploring the advantages of leasing vs. buying a car may be worthwhile before making a financial commitment on a commodity that lacks resale value.

Pros and Cons of Buying a Car: The following pros and cons of buying a car can help us decide on the prudence of purchasing an automobile.

Federal Income Tax Deduction: According to the American Recovery and Reinvestment Act of 2009, people buying new cars, light trucks, motor homes and motorcycles after Feb. 17, 2009, qualify for a federal tax deduction on state and local taxes that have to be paid on the purchase of the above mentioned goods. The deduction is contingent to the buyer's modified adjusted income (MAGI) falling within the following tax bracket: $125,000 and $135,000 for individuals and $250,000 and $260,000 for people filing jointly. The act also provides for the deduction of other taxes or fees that are usually paid in states not imposing a sales tax.

Monthly Loan Repayment: For most people, buying a new car involves taking a loan that is repaid over a period of 36 to 48 months. As on 12th August, 2009, the rate of interest on a new car loan, that has to be repaid over a period of 36 months, is around 7.05 percent. The rate of interest on a 48 month new car loan is 7.24 percent. Not only is the rate of interest low, dealers are also offering huge discounts to promote car sales that had taken in a hit due to the economic recession and a number of issues plaguing the auto industry.

Depreciation: A car can depreciate by as much as 30 percent within the first few years of ownership. The depreciable life of a car is generally between 5 and 7 years. Since most people purchase a car by availing a car loan, which is usually repaid over a period of 36 to 48 months, it is possible that after deducting the cost of depreciation, the worth of the car may be less than the remaining balance on the car loan.

Pros and Cons of Leasing a Car: Although buying a car gives one a sense of ownership, leasing may not be a bad option for people who are unable to buy a car but can afford the lease payments in the short run.

Tax Benefits: In most states in the US, people are not required to pay sales tax on the entire value of a leased vehicle. Sales tax is paid on the value accrued to the lessee during the leasing period. Moreover, the tax is not paid all at once but is spread out over the term of the lease and constitutes a part of the monthly lease payments. Leasing a car also offers tax benefits to business entities provided the leased vehicle is used for business purposes.

Lower Payments in the Short Run: Generally, no down payments are required for leasing the car. The monthly lease payments are lower provided a person is leasing the vehicle for a short period of time. In the long run, the principal and interest payments on a car loan work out to be less than the monthly payments required for leasing.

The above discussion, on leasing a car vs. buying a car, may have left the readers confused about the appropriate course of action since both leasing and buying seem to have their advantages. Buying a used car is an option for people who are interested in owning a vehicle but are unable to afford the monthly loan payments. Before buying a second hand car, one must be aware of the issues involved in purchasing a used car, to ensure that one is not buying a car which in addition to lacking resale value, is also fraught with technical problems.