New Car – Lease or Purchase ?08 Jan
Cars are a significant cost to everyone, and we’re often asked what is the best way to finance them , so I thought I’d work through the numbers to see what are the different ways of sorting out your next car. The two options your going to see most commonly are either leasing a car or buying one.
Of course this guide is only really relevant to right here, right now as lots of considerations can change, i.e. tax rules, interest rates, market price of cars etc. As always if you need any help with this feel free contact us.
LEASING YOUR CARS
Pros |
Cons |
| New car every 3 to 4 years | Penalties if lease cancelled before end of the term |
| No hassle of selling when replacing | Mileage restrictions |
| No huge repair/maintenance costs to fund (dependant on lease agreement) | 50% of VAT charged cannot be reclaimed |
| Hi spec cars possible which are usually out of your budget | |
| Low initial outlay |
BUYING YOUR CARS
Pros |
Cons |
| Full ownership | Possibility of negative equity |
| Possible to make modifications | Responsible for all costs after the end of warranty period |
| No mileage restrictions | High initial outlay if not financed |
EXAMPLE: VW Golf 2.0 Tdi 110 SE – Cost New – Approx £16000
BUY Loan over 36 month period – Approx £504 per month (inc interest £59.26)
LEASE Initial up front payment – 3 months £810 + VAT – thereafter £270 + VAT per month
AVAILABLE TO OFFSET AGAINST TAXABLE PROFITS
IF YOU BUY
| Capital Allowances | 1st & 2nd years | 2500 |
| 25% of reducing balance thereafter | ||
| Loan Interest | £59.26 per month | 711 |
| TOTAL FOR YEAR | £3711 |
IF YOU LEASE
| Lease Payments | £290.25 per month | 3483 |
| 50% of VAT not reclaimable | ||
| TOTAL FOR YEAR | £3483 |
ACTUAL COST TO THE BUSINESS
IF YOU BUY
| Capital and Interest | £18144 |
| Approx Value (after 3 yrs) | £ 8000 |
| NET COST | £10144 |
IF YOU LEASE
| 38 Lease Payments | £11029 |
| Inc 50% of VAT not reclaimable | |
| NET COST | £11029 |
Although it appears to more tax efficient to buy the vehicle, in today’s economic climate flexibility is the key. Do you really want to be commit yourself to a long term loan,IF you can secure one. Also the second hand car market is unpredictable. In comparison the monthly lease payments are lower than the loan repayments, the lease can also be cancelled (with a penalty which tend to be 3 months payments which ) this can help with short term cash flow problems. For now, I would opt for the lease.
