– by Chris Cowland –
Lease or buy? This is a good question, but there’s no easy answer. Let’s look at a nine-year ownership cycle.
Whether to lease or buy is primarily a question of lifestyle. If you have an aversion to breaking down, have deep pockets, and you wouldn’t be seen dead in a car more than three years old, then leasing is the way to go. Your vehicle will be under warranty, and at the end of the lease you hand the keys back to the dealer and drive off in the latest model. You repeat this twice more over the nine years.
Cars depreciate, but nowadays most last at least nine years or 180,000 kilometres before major maintenance expenses are due. So, if you have taken out a five-year loan to purchase your new car, then you have no loan payments for nearly half your ownership, and at the end you can keep the proceeds if you sell the car. Your initial payments will be higher than the lease cost. That is because for a lease, you are only financing the depreciation on those first three years of ownership, but for a loan, you are financing the whole purchase cost.
If you want to conduct a fairly comprehensive calculation, you will need to gather information about the cost of the vehicle, the inherent interest cost in the lease or a loan, the expected maintenance cost, and the anticipated written down value after three, six or nine years of ownership (publications such as the Black Book show this, giving trade-in values, dealer prices, and private sale values). Industry Canada has a great web site at http://tinyurl.com/q84z3vb which I would strongly recommend for performing the math, and also scroll down to the “Tips” section. Read this several times; it will save you thousands of dollars.
This brings me to a third alternative. A car depreciates 30% as you drive off the dealership lot, and probably another 20% in each of the next two years. Why not consider saving up some money, and then buy a three-year-old car for cash for maybe 30 to 40% of its new car price? My daily driver is a 17-year-old BMW 528 with 100,000 kilometres; it cost me $7,000 (about 14% of its value when new). I change my own oil and filters, and maintenance costs this year were about $100. It suits my lifestyle. (“Old and cheap,” my wife says.)
Chris Cowland is a Chartered Professional Accountant with Cowland & Associates in Sidney. Questions or feedback? Contact him via email at admin@sidneycpa.com.
