These are some of the major differences between leasing and buying outright:
1. Instalments vs. Upfront Payment
Lease payments are made in instalments, while outright purchases attract a full upfront payment. Depending on your situation, you might find that payments in instalments are more preferable to a large upfront payment. Paying in instalments means businesses can divert precious cash flow to other areas of the organisation, rather than spending it all on equipment or technology assets.
Many businesses find that instalment payment arrangements are considerably better for their cash flow than upfront purchase arrangements, particularly as these payments are usually tax-deductible.
2. Repair and Maintenance Costs
While outright purchases confer ownership over the purchase item straight away, leases usually do not. Depending on the type of lease, this can mean that the lessee or the person leasing the item is not responsible for repair and maintenance costs. Instead, the hire-purchase company or financing company might be the party that covers certain repair and maintenance costs, though of course, this will depend on the specific terms of the agreement.
3. Warranty Period
Similarly, leased items could have a longer warranty period than items that are purchased outright, though this would depend on the type of lease. The warranty period may extend for the entire duration of the lease period (commonly 2 to 5 years, or even more), which can mean a much longer warranty period for the leased item compared with an item purchase outright. This could mean that leasing offers a lower risk for the business or individual having to pay for replacement.
4. Tax and Ownership
Tax deductions might be available for both leased items and items purchased outright, especially for business equipment. However, if lease payments are larger than depreciation tax benefits, leasing could provide a better tax advantage by offering higher tax deductions.
Outright purchases can offer certain advantages associated with ownership equity. The buyer may want to use their ownership equity in the itemto borrow money. They might want to modify the item in some way, which would probably beimpossible with a leasing arrangement.
However, leasing might offer more flexibility, as buyers can often upgrade goods at the end of the lease period without the need to trade in or to find a buyer for obsolete goods and equipment. The risk of resale value goes to the owner, and so the leasing party has no exposure to the risks associated with reselling the item.
Which is Right for You?
Each option comes with its own advantages, but leasing tends to provide more flexibility and cost-effectiveness for parties, particularly businesses that can claim the relevant tax deductions.
An outright purchase tends to suit buyers who do not mind making a substantial upfront payment, prefer to have ownership equity, and want to modify the item in some way.
Leasing enables owners who enjoy the latest technology to upgrade more frequently. It also offers lower periodic payments and eliminates the need for a large upfront payment or deposit, such as those associated with home loans. This can make a vital difference for businesses with cash flow constraints. Additionally, leasing provides considerable tax benefits for businesses,since lease payments are often tax-deductible as a business expense.