Leasing vs Buying a Car – A Comprehensive List of the Pros & Cons

If you drive your personal vehicle for business purposes, you can claim tax deductions. I addressed that in my last article when I talked about whether you should claim the standard mileage rate or actual expenses on your taxes. Yet, leasing vs buying a car may make a difference to you as a business owner, too. Is it better to buy or lease a car for business? Let’s weigh the pros and cons.

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This week on The Financially Simple Podcast:

• Lease or Buy a Car? Weighing the Pros and Cons (1:01)
• Three Points to Consider (1:11)
• Pros of Leasing a Car (2:54)
• The Cons (6:42)
• Pros of Buying a Car (9:03)
• The Cons (12:27)
• Purchased vs. Leased – Taxes (13:0)

It’s a simple question. Should you lease or buy a car for small business? If you’re trying to build your business’s worth and your personal net worth, every penny you make and spend matters. Honestly, your personal worth is probably tied to your business’s net worth, so that makes budgeting your expenses even more important. Although you may not worry about “small” business or personal purchases, “big” purchases can affect your business’s cash flow and have long-lasting personal tax advantages or consequences. Therefore, if you expense your car payments through your business or you claim your car as a depreciable business asset, you need to decide whether purchasing or leasing the vehicle is the best choice for you.

Here are the pros and cons of each choice as I see them:

The Pros and Cons of Leasing a Car for Business

The Pros

1. Your monthly payments are typically lower than they would be if you were buying a car.
2. Your down payment requirement is usually lower than it would be if you were buying a car.
3. Typically, you don’t have to pay any up-front sales tax because you’re not purchasing the vehicle.
4. You’re never upside-down in the car. In other words, you don’t owe more on a loan than the car is worth.
5. There’s a good chance that routine maintenance is covered in your lease agreement.
6. New cars are typically covered by the manufacturer’s warranty, so you shouldn’t have to pay for expensive repairs.
7. You don’t have to deal with pushy salespeople pressuring you to buy.
8. You get to drive a new car more often.

The Cons

1. You never own the vehicle.
2. You pay for miles you drive that exceed the standard 10,000 or 12,000 mileage limit.
3. Most of the time, you can’t make modifications to the car.
4. It’s hard to get out of a lease.
5. You typically need pretty good credit to get the best lease results.
6. You cannot depreciate a leased vehicle on your tax returns.
7. If you choose the standard mileage rate the first year, you must take that same rate every year.

The Pros and Cons of Buying a Car for Business

The Pros

1. The longer you own the vehicle, the lower your long-term cost.
2. You can sell your vehicle anytime you want to sell it.
3. You’re not bound to a mileage limit.
4. You can make modifications to the car.
5. You can depreciate the vehicle on your tax returns.

The Cons

1. You’ll typically pay higher up-front costs because you’ll owe sales tax, title fees, etc.
2. Your monthly loan payments will probably be higher than lease payments.
3. Eventually, the manufacturer’s warranty expires, and you’ll have to pay for major repairs.
4. Typically, the dealership doesn’t cover vehicle maintenance costs when you purchase a vehicle.
5. If you depreciate the vehicle completely, you will probably owe a recapture tax when you sell it or trade it in.

The Ultimate Decision

You can take all of the pros and cons I just listed and weigh them back and forth in your mind. You can create charts and graphs and spreadsheets all day long. But ultimately, your decision about leasing vs. buying a car boils down to your answers to three questions:

1. How many miles do you drive a year? In my world, I drive somewhere in the neighborhood of 25,000 – 30,000 miles a year. I realize that’s unusual, but I have clients in sales who put more miles on their vehicles than I do. So, if you’re driving 1,000 – 10,000 miles a year, then leasing might make sense for you. However, if you’re driving more than 10,000 or 12,000 miles a year, buying might make more sense.
2. How long will you keep your car? If you like to get a new car every three to four years, try leasing. Whereas, if you drive your cars until the wheels fall off, buying may be your best option.
3. How much do you want to spend on your monthly payments? Finally, if you’re worried about monthly payments, try leasing to keep them as low as possible. If you’re more worried about the lifetime costs of a vehicle, try buying.

My Conclusion

For what it’s worth, here’s what I would recommend. When in doubt, buy. Don’t worry about leasing. If you don’t know for sure what to do, buy the car. According to cars.com, 80% of people in the United States buy their cars. Meaning although you may hear a lot about leasing, it’s not really a popular option, especially not among business owners because of the tax incentives they get if they buy a car.

RELATED ARTICLE: Decided that buying is the way to go? Check out the math I used to pay the lowest price and financing.

Maybe you’re debt-free and you don’t need major tax deductions. You like the thought of driving a new car all the time and having the dealership foot your maintenance bill. If that’s you, congratulations on reaching that business milestone. Maybe you should lease a car. Either way, I hope this has given you some things to consider when faced with this decision and weighing buying vs leasing a car for business.

This article is part of the Cash Flow area of our ever-expanding series: Personal Finance for Business Owners. Expand your wealth-building knowledge by heading over today!