More than likely you or a close family member have faced a decision to lease or buy. Whether you’re interested in acquiring a new car, a home or a child’s athletic gear, your choice to lease or buy is likely influenced by what you learned growing up or by discussions around the office water cooler. Why does it feel like it’s such a tough decision?
This article outlines the basics and provides a launch pad for making an informed decision that best fits your situation.
As buyers’ needs evolve, companies are offering more products with both lease and buy options. It’s important to ask a few questions when determining the best option for you or your family:
- How long will you use the item?
- Are there maintenance costs associated with the item?
- Will there be a resale market when you are done using the item?
- Do you want or need to customize the item?
With depreciation baked into both lease and buy contracts, the market for leasing has extended to various items such as commercial vehicles, furniture and even restaurant equipment. Another major trend is emerging in the market, which is to rent for a single use with companies like Uber or Airbnb. This can provide an immediate short-term solution without the commitment of a lease or buy contract.
Leasing provides a great opportunity to stretch your money. Of course, there’s a catch, and companies usually place stipulations on the item to protect its future value. Using the example of a car lease, you might have mileage caps, wear and tear charges or steep termination fees. The qualitative value of driving a new car is inherently different for everyone, and whether this justifies the financing structure is simply another piece to the puzzle.
Ownership starts to show its true value over longer time horizons. The downside is that if anything happens to the item during its useful life, it’s the owner’s responsibility. Going back to the car comparison, ownership enables you to modify, drive an unlimited number of miles and/or sell the car whenever you wish.
Consider the Johnsons, a family of four with two children under 12. As baseball season approaches, young Luke desperately wants a new baseball bat. His parents consider shelling out cash for the latest and greatest aluminum Louisville slugger. If they slow down and ask themselves, how long will Luke use this bat…one season? Two? And what will we do with the bat when Luke hits his next growth spurt? In this situation, leasing could save his parents some extra cash with the assumption Luke will soon move on to the next latest and greatest.
Staying with the Johnson household, this time the family car has broken down. Their first car lasted 10 years before breaking down. They intend to keep the next car for a similar time frame, and they know their two young children will likely add some “character” to the car, so they should consider buying because the item will provide value far above a few years’ use.
This isn’t always the case. My colleague Hannah Ahmed wrote a great article that provides alternative considerations when facing a large purchase, specifically a home purchase.
Here at Merriman, we encourage you to research all available options before making a financial decision. Understanding the pros and cons related to your specific situation is the backbone of making the correct choice. If you’ll be using the item short-term, with no need for customization or excessive use, leasing could provide a lower overall cost of ownership when looking at a short time horizon. If you feel the item can provide you or your family with long-term benefits, or you want to tinker with the item, ownership can provide better value.
The decision to lease or buy depends on each person’s situation. If you or a family member get stuck or questions arise, please contact us so we can help you make the best decision.
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Mike came to Merriman after several years spent in corporate finance and brought with him an innate sense of discipline. Whether surfacing through routine, structure, or a desire for predictability, discipline often guides his decision making. He enjoys helping clients determine goals and create a plan to achieve them. He sincerely believes you can accomplish all you set out to with the right structure and discipline.
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