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Is it Better to Buy or Lease a Car for Business?
Ask yourself these questions to determine whether buying or leasing is the right decision for your business.
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You need a new company car. Should you buy or lease? Generally speaking, a lease is preferable if you only expect to use the vehicle for three years or less, won’t put excessive mileage on it and don’t want to make a significant financial commitment up front. If you think you’re going to keep the vehicle for at least five years and your budget allows for it, buying it outright could be the better option.
Before deciding, weigh the pros and cons of each choice. To determine the best option, it’s helpful to answer some simple questions about how you plan to use your car.
How to decide if buying or leasing a car is best for you
Leasing or buying a car for your business depends on your unique circumstances. Consider the following questions. Their answers will lead you in the right direction.
1. How many miles do you anticipate putting on the vehicle?
You must understand how far you’ll drive the car and how many miles it will rack up. Leases typically come with an allowance of up to 12,000 miles per year. This means that when you return the car, it must be at that mileage or under. If you lease the car for three years, at the end of the lease, that means 36,000 miles. Some leases allow for a little more, such as 15,000, or a little less like 10,000. If you go over the mileage allowance, you’ll be charged a certain rate per mile — and it can get expensive quickly.
“If you plan to drive long distances regularly — such as for work commutes, road trips or business travel — buying a car is the better option since there are no mileage restrictions,” explained Wes Lewins, chief financial officer at Networth.com. “On the other hand, if you drive less and stay within mileage limits, leasing may be a more cost-effective choice with lower monthly payments.”
2. How much money do you have for a down payment?
Another essential consideration is knowing how much you can put toward a down payment. When you lease a car, you may need less money up front, and some leases don’t require a down payment at all.
Generally, the less you put down, the higher your monthly payment. However, even with a slightly higher payment, lease payments are still lower than financing payments. Many advisors say you should put the lowest amount possible for a down payment when leasing a car. In contrast, when financing a car, you’ll want to put more money into a down payment to help decrease your monthly payment.
“Buying a car may have higher up-front costs but provides long-term savings since there are no ongoing lease payments after the loan is paid off,” said Rose Jimenez, chief finance officer at Culture.org. “Leasing, however, offers lower monthly payments and may require little or no down payment, making it easier for those with limited cash flow to drive a newer car. To decide, buyers should calculate the total cost of ownership over five to 10 years, considering maintenance, insurance and depreciation.”
3. How will you use the vehicle?
Leasing companies may be able to dictate how and where a vehicle is used. Keep the following in mind:
- Area limitations: A leasing company may limit the areas in which you can drive, which may interfere with your business plans.
- No modifications: Lewins cautioned that leased vehicles can’t be modified to promote your business. “If you plan to modify or customize the vehicle, such as adding performance upgrades, a special paint job or business branding, buying is the only option since leased vehicles must be returned in their original condition,” Lewins said.
- Limited use cases: You must ensure you can use your leased vehicle for the business purposes you have in mind. For example, if you plan to drive for Uber, you may be out of luck or face strict limitations. “Those using a car for business, ridesharing or frequent heavy-duty tasks should consider purchasing to avoid mileage fees and lease restrictions,” Lewins advised. Additionally, if there is a lot of wear and tear on the inside of the car, you will have to pay for it when you turn your car in at the end of the lease.
“If you plan to keep the car for many years, buying makes more sense, as cars typically last well beyond their financing period,” Jimenez advised. “Resale value should also be considered — certain brands retain value better, making ownership more financially rewarding. Leasing is ideal for those who prefer driving a new model every few years without worrying about trade-ins or depreciation.”
>> Learn More: Commercial car insurance laws by state
Car leasing advantages and disadvantages
Leasing a car can be a great option for business owners who prefer lower monthly payments and the ability to upgrade to a new vehicle every few years. However, limitations and costs may be prohibitive. Consider the following advantages and disadvantages:
Advantages
Tax advantages | Monthly lease payments are usually a tax-deductible business expense. |
|---|---|
No maintenance or repair expenses | Leases often include regular maintenance. |
Easy turnover | You return the vehicle at the end of the lease without the hassle of selling it or disposing of it. |
Lower monthly payments | Generally, leases have slightly lower monthly payments than you’d pay if you bought a car. |
Disadvantages
Mileage limitations | Most leases limit driving mileage from 12,000 to 15,000 miles per year. If you exceed the limit, you may be charged 18 to 25 cents per mile over the allowance. For example, if you drive more than 30,000 miles on a two-year lease, you would face significant extra costs. |
|---|---|
You get what you get | Leased vehicles generally can’t be customized. |
Beware of the small print | Additional charges may apply for early lease termination and excessive wear and tear due to careless driving or improper maintenance. |
With a lease, you also need to be aware of the residual value — the amount you must pay at the end of the lease if you choose to buy the vehicle. Generally, the higher the residual value, the lower the monthly payments, and vice versa. However, if the car is appraised at a lower value when the lease ends, you still pay the residual value.
>> Learn More: The Top 10 Cars for CEOs
Advantages and disadvantages of buying a car
Buying a car offers full ownership, customization freedom and long-term cost benefits. However, it also involves higher up-front costs and ongoing maintenance responsibilities. Below are the pros and cons of purchasing a vehicle:
Advantages
You own it | You can sell the vehicle and recover some of your original investment. You can drive it as much as you want without worrying about exceeding mileage limitations. |
|---|---|
Customization | It’s your vehicle; you can add whatever options or custom paint jobs you want. |
Tax advantage | The cost of the vehicle is a depreciable business expense. Certain hybrid and electric vehicles may also be eligible for tax breaks. |
Disadvantages
Larger capital outlay | Even if you finance, monthly payments are often higher than leasing. |
|---|---|
Maintenance and repairs | While many new cars include “free” service for the first three years or a set mileage, beyond that, you are responsible for these costs. |
You sell it | When it’s time to replace an older vehicle, you must handle selling it, trading it in, or disposing of it. |
Should you buy or lease a company car?
You should buy a company car if:
- You’re a large company needing day-to-day vehicles without restrictions for your fleet.
- Your company intends to customize vehicles to suit operational needs, such as adding a logo or specialized features.
- Your employees are rough on company vehicles, leading to noticeable wear and tear.
You should lease a company car if:
- You’re a small company with a tight budget looking for lower monthly payments.
- You’d rather avoid costly maintenance responsibilities.
- You will use the vehicle infrequently or for short-distance travel.
- You want a cost-effective way to access higher-end cars with the latest technology and safety features.
Business car leasing vs. buying FAQs
Amanda Hoffman contributed to this article.
