Net advantage to leasing (NAL) looks at the financial benefits of a consumer or business leasing an asset instead of buying it. There are a number of costs associated with both leasing and buying an item that are analyzed. You can figure this metric out by comparing the net present value of buying an item outright with the net present value of leasing it. The biggest advantage of leasing is that you’ll spend less money on the item upfront than if you purchase it.
Learn more about what net advantage to leasing means and how to calculate it.
Definition and Example of Net Advantage to Leasing
Net advantage to leasing looks at the financial advantages to consumers and businesses of leasing an item instead of buying it. You can calculate the potential benefits of leasing by comparing the net present value of leasing an item with the net present value of purchasing it.
- Alternate definition: Net advantage to leasing is the total amount of money an individual or business can save by leasing an item.
- Acronym: NAL
For instance, businesses will occasionally lease equipment instead of buying it. They don’t own that asset, but leasing could help the company preserve cash flow and afford a higher-end piece of equipment.
How Net Advantage to Leasing Works
Net advantage to leasing considers the benefits of leasing an item instead of buying it. Both leasing and buying come with direct and indirect costs, which can be understood by looking at a friction cost analysis. You can also compare the net present value of leasing an item with the net present value of purchasing it.
A friction cost analysis looks at the direct and indirect costs associated with buying or leasing an item.
For instance, let’s say a business owner needs a delivery vehicle for their business operations. They may wonder if they should lease the vehicle or just purchase it outright.
If they purchase the vehicle, they’ll own the asset and can record a depreciation expense every year. This could help that business reduce its taxable income. However, the business owner will also be responsible for maintenance and repairs.
In comparison, if they lease the vehicle, they won’t be able to record depreciation costs. But leasing will help the business preserve cash flow because it will pay less money upfront. And it may be able to afford to lease a nicer vehicle.
But to look at the true net present value of leasing versus buying, the business owner needs to consider the anticipated payments and interest rate. This will help them determine which is the better option.
Leasing vs. Buying
|You have the right to use the asset for a period of time but you don’t own it||You own an asset|
|Lower monthly payments||Higher upfront cost or monthly payments if you take out a loan to buy|
|Allows you to obtain a more expensive item than you could afford to buy||You may not be able to afford as much, but you own the item|
It can be hard to know whether you should lease or buy an item outright because both come with advantages and disadvantages.
One advantage of leasing is that you’ll pay less money upfront, and you may be able to afford a more expensive item than you could have purchased.
For instance, many people choose to lease cars because it allows them to drive a higher-end vehicle than they could have bought. And when you take out a lease, the monthly payments may be lower than if you took out a loan. However, the downside is that you don’t own the asset.
In comparison, when you buy an item, you own that asset. However, you may not be able to afford as much, and your upfront costs will be higher. And if you take out a loan to complete the purchase, your monthly payments will likely be higher than lease payments.
- Net advantage to leasing refers to the financial benefits of leasing an item as opposed to buying it outright.
- You can evaluate the net advantage to leasing by comparing the net present value of leasing an item with the net present value of purchasing it.
- When you lease an item, your upfront and monthly costs will be lower, but you don’t own that asset.
- When you buy an item, you own the asset but your upfront or monthly costs will be higher.