Lease vs. purchase: what to consider before signing

Understanding lease vs. purchase

Lease

A lease is a contract where the borrower, or “lessee”, agrees to make payments to the property owner, the “lessor”. This is a mutually beneficial agreement as it gives the lessee the chance to rent the property without the commitment of buying, while the lessor receives income from the lease payments.

A lease agreement outlines a set duration or time frame, as well as consequences that both the lessee and lessor may incur if they attempt to terminate the lease early.

Purchase

A purchase is simply a transaction to buy property or merchandise. It is a one-time payment, exchanging money for an item.

What to consider when leasing vs. purchase

When weighing your options to lease or purchase, there are a few things to consider. Your monthly income is going to be a large determining factor, as well as any available savings to cover initial fees and a down payment.

You should also be aware of your credit score, as it is a major consideration when looking at applying for a lease or financing a purchase. Here are some other important things to think about when looking into leasing property:

1. Monthly Cash Flow

Leasing property may mean paying a lower monthly payment than financing. If you need more money in your monthly budget, then signing a lease may be more favorable in terms of cash flow. In addition, most lease agreements require a smaller down payment than financing a loan, so this is helpful when determining how much you’ll need to save.

2. Fees and Interest

Before making the decision to sign a lease agreement, ask about fees and interest. The exact terms are a bit different than a traditionally financed loan, but still important. Some fee considerations include sales tax, final payment amount, origination fee and other fees.

3. Flexibility

Leasing any sort of property can give you more flexibility, as you’re not tied to a long-term loan for an extended period. Take your personal situation into account when choosing to lease furniture, jewelry, or other property. It may make more sense to sign a short-term lease for several months while you move around for work, or to test drive a car before deciding on which one to purchase.

4. Credit History

Financing a loan or applying for a lease have different credit requirements. Some lenders will work with borrowers who have a lower credit rating, while others may not. Be open to both lease and purchase options to find the best deal based on your credit.

Benefits of lease vs. purchase

There are benefits to both leasing as well as purchasing property. Let’s start with leasing -- the main pros include the following:

• Lower monthly payments
• Flexible timeline
• Little to no down payment
• Ability to “try before you buy”
• Predictable future value

On the other hand, there are some benefits to purchasing property too. They include the following pros:

• Rights of ownership
• Customization of property
• Long-term investment
• Fewer fees and interest
• No ownership restrictions

If you find that you simply cannot afford a larger monthly payment for furniture, appliances, or other items, then choosing to lease may be a good option. Still, it’s important to know what the cons of leasing or purchasing may entail before signing on the dotted line.

Drawbacks of lease vs. purchase

While there are benefits to lease and purchase, there are also some drawbacks you should be aware of. Take all these things into consideration to make the most informed decision possible. Let’s compare the drawbacks of leasing:

• May have usage restrictions or limitations
• Must be returned in original condition, less normal wear and tear
• May not be a long-term solution
• May come with higher fees and finance charges
• May need good credit to qualify

There are also some cons to purchase, as listed below:

• Fluctuating market value
• May require sizable down payment
• Ownership of depreciating asset
• Larger monthly payments

When it comes to leasing property, there may be a few times when the pros outweigh the cons. In some cases, not overextending your budget to afford something you need may be a smart idea.

Run the numbers

To find out if leasing is better than purchasing start by running some numbers. A quick online search will produce results for helpful lease vs. purchase calculators. This will help you compare the rates side-by-side as well as figure in depreciation, lease fees, and interest rates.

Final thoughts

In the end, the decision to lease or purchase property will come down to your budget, credit history, and lifestyle needs. Weigh the pros and cons of leasing, as well as the pros and cons for financing a property to purchase. There’s usually not a one-size-fits-all answer but use the knowledge you’ve gained to make the right decision for you.