From the course: Accounting Foundations: Leases

Understanding leasing vs. buying

From the course: Accounting Foundations: Leases

Start my 1-month free trial

Understanding leasing vs. buying

“

- So, you like to drive nice looking cars, relatively new cars. - That's true. When I'm on the highway, I like to be safe inside a proper motorcar, unlike you by the way. I've seen you driving some pretty sad looking vehicles. - Now, now wait. Are you referring to that 1975 Buick Electra that I drove for many years? Now that was a proper motorcar. Almost 20-feet long, 455-cubic inch V8 engine that delivered power to spare. The thing handled like a dream. - Yeah, okay fine. Now back to your original question. Yes, I do like to drive new cars. - See, I remember that for a number of years you preferred to lease your cars rather than buy your cars. - Correct. When we had children living at home, my wife and I often leased our cars. - Okay, so what were the important factors behind your decision to lease rather than buy your cars? - For us, the key reason was a constantly changing family situation. As our seven children grew up and began to leave the house, our vehicle capacity needs changed every few years. - So you didn't need as many seats in your car after Crystal, JD, and Ashley left the house. - That's absolutely right. In those days, we leased a larger car for three years, knowing that in three years we would would come back and downsize to a smaller car. The leasing option made this downsizing easier to do. - Okay now, how about now? Do you lease or buy your cars now? - Well, just a couple of months ago my wife and I bought a new car. When I was in the car dealership office taking care of the paperwork, there were two other people in there at the same time. They were leasing, I was buying. - So you got no more changing family size? - Nope, it's just the two of us at home now, my wife and I, so our seating capacity needs are pretty constant. We now buy cars and own them for a bit longer. Okay, so in your experience, what factors have you seen that cause people to lease rather than buy cars? - Well for many people, the attraction of a lease is a lower monthly payment. Typically, you can lease a car for a lower amount than you would have to pay on a monthly loan payment to buy that same car. - Okay, but why are the lease payments lower than the monthly car payments? - [Man On Right] Well when you buy a car, you are buying the whole life of the car. So you have to pay for all of that and that is reflected in the size of your monthly car loan payment. If you're leasing a car, you're only buying two or three years of the car's life. You're not paying upfront for all those years that you're not going to use. - So are you saying it's always better to lease cars rather than buy? - Absolutely not. If you plan to keep your cars for five years or more, buying almost certainly will cost you less than a series of leases. - So, if you plan to constantly upgrade to a new car, say every two or three years, then leasing may give you total lower monthly payments. - That's true, with one warning. Car sales people often use the lower lease payments to upsell people to a more expensive car than what they need or want. - I can see that if you allow this to happen, then car leasing is definitely a bad idea. - The key thing to note is that my reasons for leasing my cars had absolutely nothing to do with accounting or financial reporting. My wife and I don't prepare financial reports for investors or banks, we're just a family. - Many times the reasons for leasing, rather than buying, depend on economic factors that have nothing to do with accounting. - Exactly.

Contents