MANILA - Next to buying a home, getting a car is one of the bigger financial decisions that you might have to make. It is also a dizzying one, with the expansive range of models and financing deals to choose from.
Given the slew of offers for prospective buyers, you’re probably wondering which one is best for you. But before you buy a car, consider another option – leasing one instead.
While taking out a loan for a car and leasing may seem very similar, their impact on your overall finances may be very different. To know which option is best for you, here’s a quick look at the pros and cons of leasing versus buying a car. Based on these, you can tell which is the smarter option for you.
Say "yes" to leasing:
· If you like changing to the newest model, leasing frees you from the burden of having to sell your old car before you can get a newer model. All you have to do is return the old car to the lessor, pay the fees for a new lease, and you can get your hands on the next model.
· Leasing usually means a lower monthly cash out versus paying for a car loan. That’s because the lease only covers the depreciation of the car for a given number of years, and not the cost of the vehicle. It also usually means lower down payment or upfront costs, which dealers can waive for you.
· If you own a business, leasing is friendlier on your balance sheet. You can deduct a portion of depreciation and financing costs when you lease.
Say "yes" to owning
· If you want to keep the car for the long haul, buying one is still the cheaper option since you stop making payments after you’ve paid the full amount.
· When good financing deals are available and interest rates are low, you can purchase a car for almost the same cash out as when leasing one. In some instances, you can get a new car for a very low down payment or none at all, which can give you the advantages of owning over leasing.
· If you want to resell the car in the future or pass it on to someone (e.g. spouse, child), then buying is the option for you.
Of course there are also downsides to leasing and buying.
Say "no" to leasing if
· You drive long distances, as you may end up having to pay extra charges since the lease agreement specifies a maximum mileage. If you go beyond this, you will have to pay more.
· You intend to keep a car for a long period of time, as leasing will be an expensive and impractical option.
· You are prone to minor accidents, leasing may be expensive since lease agreements usually come with a wear-and-tear clause.
Say "no" to buying as
· Maintenance costs can be costly, especially as the car ages, so if you want to skip this part, then consider leasing instead.
· A car depreciates quickly. If you don’t like having to put out a lot of money for a depreciating asset, then you may be better off with a lease.
· If you don’t need the car for a long time—let’s say you envision leaving the country in a year or two—leasing will save you a lot of money.
Before making a decision, you may wish to run the numbers for a lease and for a sale. Note that most cars depreciate by 20 percent a year over a five-year period, so in 5 years’ time, the car’s book value is zero. This book value is different from the market value of a car, which is the price at which others are willing to pay for your car. Your 6 year old sedan may be fully depreciated, yet you may still be able to sell it for six figures.
Find out how much the leasing company charges for a lease and check out the financing plans for a car. Suppose you want a car worth P1 million. When you buy, you will be paying for the entire P1 million. With a lease, you only pay for the time that you will be using the car, or how much it depreciates in a given time period. Leasing works best when your time horizon is short. If you will lease the P1 million car for one year, you will be paying for just 20 percent of its value.
Note as well that to take out a lease on a car, you would need to go through the same process as you would when applying for auto financing. Both banks and car dealerships offer leasing services. You would need to show capacity to pay and submit some documents, plus sign the lease contract. Make sure to take note of the fine print. Generally, more documents are needed when taking out a lease than when buying a car. Good luck!
Grow Your Money is an editorial partnership between news.abs-cbn.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
Visit www.citibank.com.ph for more information.