Should you Lease or Buy a Car? What the Dealership Will Not Tell You
Welcome to the fourth conversation in this series with David Chong Yen and Eugene Chu, Chartered Accountants from DCY Professional Corporation in Toronto. David and Eugene have kindly agreed to record a series of videos that offer advice to new graduates and practicing dentists on the most common accounting and tax questions they are likely to face early in their career.
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Until next time!
Many new grads first major purchase will be a car, what tips do you have for buying a car?
We understand the allure of buying a nice car, you’ve worked hard the past few years in school and want to reward yourself, but you should be aware that cars are a depreciating asset. Depreciation is a fancy word for something that is worth less and less over time. The more you pay for a depreciating asset, the more you lose over time because at the end of it’s life most depreciating assets are worth 0.
These are tips for buying a car:
- Don’t negotiate based on what you can afford monthly. Negotiate on the final all-in price. The dealership’s goal is to get you in the most expensive car you are willing to pay for. If you set your budget at $30,000, stick to it. Don’t let the dealership sell you on a low-monthly payment of $500. $500 per month for 7 years ends up being a $60,000 car.
- Use the internet to research your car and costs. There are many resources that provide info on the invoice costs, what other buyers are paying for the same car and some even have a pre-negotiated price for various cars, if you don’t like haggling.
- Don’t let tax incentives influence your budget. Many dealerships will sell you on the tax-write-offs of buying a car to influence you to extend your budget. Stick to your budget and don’t let tax incentives determine what you buy, it doesn’t make sense to save $5000 on taxes but spend $10,000 more.
What about leasing or buying a car? What would you choose?
First, let’s clear the misconception regarding taxes and leasing and buying. You can write-off the car either way, up to prescribed amounts, regardless of whether you lease, finance or buy in cash as long as the car is being used for business. Driving to/from home to work directly (vice-versa) is not considered tax deductible mileage.
As we stated before, ignore the taxes, stick to your budget. When deciding whether to lease or buy, our rule of thumb is:
- If you intend to change your car every 5 years or less, and
- You drive less than 24,000 kms a year, then lease.
If you don’t meet the above criteria then finance/buy.
Most of the depreciation of a vehicle occurs at the beginning; hence, if you are going to change cars every 5 years or less, then at least you can return it to dealership at its depreciated value.
Leases carry a per-Km charge for excessive mileage; hence, if you drive a lot, the excess Km charge could be quite high.
Full Interview (7.01″)