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Should companies buy or lease vehicles? Report

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Updated: Sep 13th, 2019

Executive Summary

The question as to whether companies should lease or buy vehicle can best be answered from a case by case analysis. There are several issues that first have to be addressed in order to answer the question.

Businesses need to bear in mind that both options are financing alternatives. When it comes to that time when a business needs a car, chances are high that most businesses will first investigate the monthly payments and go for the cheaper option (Sweeney, 1999). However, analysts argue that businesses do not need to rush for the cheaper options.

They first need to stop and consider all the things that are required to form part of their decisions. This study sought to evaluate the two options of either buying or leasing a car for businesses entities by weighing the benefits and disadvantages involved with both. Drawn from the findings, it is better for businesses to lease a car than buying a new one especially if the business depends on the car for its daily operations.

Introduction

There is a difference between leasing and buying a car. In leasing, a user pays for using the car and not for the car itself. The payment of the lease does not only cover the cost of using the car but also the depreciation that comes about as a result of using the car. Just as in most assets, cars depreciate in value over time.

Therefore, the lessee is expected to make payments for using the car within the period of the lease. Sometimes the monthly payments can shoot up if the lessee uses the car frequently and vice versa. The lessee is also responsible for the maintenance of the car until the end of the lease period (Az-Oxlade, 2000). Once the lease term ends, the lessee has the option to buy the car but at its residual value at the time of return. Even though this explanation can look simple, leasing a car requires one to consider a lot of factors.

Unlike leasing, buying simply refers to making purchase for the whole car. Once a company or a business makes the full payment for a car, it owns it. They do not have to return after a period of time. However, the buyer has the option of selling the car at its residual value or trading it in with another car (Henry, 1997).

Since the last three decades, the idea of leasing cars has become common among people because of its attractive nature. Leasing a car offers the user an opportunity to drive a new one after the end of the offer. Car dealers have been using appealing ways of advertising their deals to encourage people to lease for cars.

For instance, some of the dealers would offer low attractive payments and no down payment. Generally people with the desire to drive new cars after a period of few years should opt for the leasing option. However, it is still possible to buy a new car after a period of few years and trade in or sell the old one.

Problem definition

One of the biggest problems that business face in regards to having a car is making the decision to either have the car leased or bought. Both options have their positive and negative sides. However, the choice remains with the business owners.

Research objectives

This report seeks to evaluate the two options of either buying or leasing a car for business owners. It assesses the advantages and disadvantages of both sides and seeks to develop a solution for business owners who are faced with this dilemma.

Findings

Leasing has been described by many to be an easy way of getting a car. The process involved is very simple and one can easily be appealed into securing a lease offer. During a lease, one makes monthly payments for using the car. Leasing has an advantage for businesses because they do not have to own the car.

The cost of purchasing a new car may be high for a business to afford. However, the same business may have the finances to make monthly payments for leasing a car and use the car to aid its operations. The monthly payments for leasing a car are usually low and sometimes one does not have to make a deposit.

The payments can be considered as tax write offs which is an advantage to the lessee. In other words, tax write offs imply that the business will pay for the car, as a result money will be saved. A business can also insure a leased car in case of theft, damage, or loss; although the insurance policy is usually high than the normal policy for purchased car because of the nature of circumstances involved (Chappell, 2008).

If the car is to be owned by a business, tax considerations have to be taken into account. The business has to ensure that it has a steady flow of cash in order to get into a lease deal. This will enable the business to confidently make the monthly payments without failure. During the process of price negotiation, it is important for businesses to disconnect the negotiations from the financing methods. The two areas are completely different since they involve separate issues (Stoller, 2011).

Leasing is also good for businesses because they do not have to pay for the cost of repair. Leasing is only done on new car. One cannot lease old cars as it is better to buy an already used car than leasing it.

If a car is to be purchased and used primarily for the purpose of business, companies have to consider the internal revenue code. The code helps to create limitation on the annual deductions resulting from depreciation. In this way, a company will find it hard to write off the car within a short period of time. If the car is an expensive luxurious car, the period required for a company to write it off will even be higher.

Another important consideration is the length of time that the car is to be used. For a business, it is better if cars are renewed after a period of time. This ensures that the cars used are constantly in good condition to service the operations of the business. New cars make work more efficient and bring good reputation and a positive image to the business.

Assuming that the leased car is in good shape at the end of the lease, the company only needs to hand over the its keys and be given the keys for a new car, of course after signing a new deal. However, if a company had bought the car brand new, three years later, it will require selling the car. The process of finding a buyer for such a car is tedious and sometimes they may end up settling at a raw deal.

On the negative note, leasing may become costly especially if the lessee is exceeds the allowed mileage. There are additional costs charged if a user goes beyond the mileage allowed. The charges are based on per-mile covered. The charges can range from 10 to 20 cent per mile.

Normally, the permitted mileage is 15000 miles every year. In addition, the only time when one is expected to pay for repair is when the car is wrecked beyond tear. Another disadvantage of leasing is that when one wants to bail out from the agreement, the charges that they have to pay may be too hefty depending on the leasing company. The charges can be as high as a six month worth of payment.

Conclusion

It is cheaper for businesses to lease a car if they intend to meet this need of regularly renewing cars. If for instance, a business is to buy new cars after every 2 years, there might be a problem selling off the cars or trading them in with other cars. A close analysis of the both situations reveals that leasing is the better option in such a situation.

Leasing out a car is more disadvantageous to individuals using the car for personal use than to than to companies using the car for business use. A business may not have to worry about having equity as long as its operations are efficient and effective. This implies that owning a car for business use may not always be necessary. As long as the business is confidence of a regular cash flow, then the issue of making monthly payments becomes simple.

References

Az-Oxlade, G. E. (2000, July 7). Thinking of leasing a car? Prepare yourself and get a better deal. Chatelaine, p. 28.

Chappell, K. (2008, March 5). Auto Financing: leasing versus buying. Ebony, p. 56.

Henry, E. (1997, April 4). Buying a car: The dream and the reality. Kiplinger’s Personal Finance Magazine, pp. 79-82.

Stoller, J. (2011, September 6). Buying or leasing vehicles? Purchasing B2B, p. S22.

Sweeney, K. (1999, February 5). How To Decide Between Buying And Leasing A Car. Investor’s Business Daily, p. B01.

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"Should companies buy or lease vehicles?" IvyPanda, 13 Sept. 2019, ivypanda.com/essays/should-companies-buy-or-lease-vehicles/.

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IvyPanda. 2019. "Should companies buy or lease vehicles?" September 13, 2019. https://ivypanda.com/essays/should-companies-buy-or-lease-vehicles/.

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IvyPanda. (2019) 'Should companies buy or lease vehicles'. 13 September.

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