Tuesday, December 28, 2010

PC: lease or buy?

Feature: Lease or Buy? (Source)

Now for this week's earth-shattering question: When it's time for your next notebook, are you going to buy or lease?

It's a question well worth pondering. Leasing offers several advantages, especially for cash-strapped small businesses planning to acquire technology that tends to be quickly outdated--namely, notebooks. Most of the big notebook makers, including Dell, Hewlett-Packard, and IBM, offer leasing options to their business customers.

So here's a look at the advantages of leasing, along with questions to ask before you sign an agreement.

Why Lease?
Minimal upfront costs. With a typical computer lease, you have little if any upfront costs, unlike an outright purchase. Instead, you pay a set monthly fee for the life of the lease. That's a benefit for businesses that can't afford a big lump-sum expenditure or would prefer to use that money elsewhere--on marketing, a new Web site design, or a trip to Maui, say. (I'd opt for the last option.)

Predictable expenses. Many companies and individuals prefer having predictable monthly costs--such as a monthly lease payment--because it helps with cash flow management and budgeting.

Easier end-of-life disposal. Computers are like cars: The moment you begin using one, its value starts depreciating. With a constant flow of newer, faster, cheaper models, notebooks are particularly vulnerable to depreciation. So, after two years, your $2700 notebook may be worth less than half that amount on the open market. To get that money, however, you'd have to find a buyer.

By comparison, some leases enable you to return your notebook to the lessor (such as a computer company's financial services division) at the lease's end. In exchange, you may receive a fair-market-value credit on the computer, based on its marketplace value, condition, specs such as its processor and hard drive capacity, and so on. So if you're concerned about getting some money back when you're done with the computer, but you don't want the hassle of trying to sell it, an FMV lease may be for you.

Why Not Lease?
Buying is easier up front. To lease, you or your business must be prequalified, though that can take only a few minutes over the phone or online. There can be lots of details in the lease agreement to consider. And unlike charging a purchase price to a credit card, your computer lease most likely won't earn you any frequent-flier miles. (So long to that Maui trip.)

Buying is ultimately cheaper. If you buy a notebook outright, you'll ultimately spend less money than you would leasing or financing. Say you buy a notebook that costs $2950 after taxes and shipping. Pay for it up front, and you've spent $2950. Sign a 24-month FMV lease, and ultimately you might pay about $3284--an extra $334. (A Dell sales representative calculated these figures for me based on a $2950 notebook I feigned interest in purchasing, for the purposes of this article. Oh, the things I do for you people!) Finance that notebook with a credit card that charges 13 percent APR interest, and you're paying an extra $383.50.

Which Questions to Ask?
If you've decided to pursue leasing--and I think you should at least consider it--then you'll need to get on the phone with a sales rep and ask some detailed questions. Here are some to get you started.

What types of leases do you offer? Generally, most computer makers offer FMV and $1 buyout leases.

With an FMV lease, you may have the option to turn in your notebook when the lease ends and receive a credit from the computer company. Or you may buy the computer, either for a processing fee (around $75 to $100) or at its FMV. I used the word may in both sentences because not all companies offer exactly the same conditions for FMV or other leases--which is why it's so important to ask questions before you sign an agreement.

A $1 buyout lease means that you have the option to purchase the notebook for $1 when the lease is up.

An FMV lease is generally best if you're pretty sure you'll upgrade to a newer notebook when your lease expires. If you'll want to hang onto the notebook, then you should consider a $1 buyout lease. Keep in mind, though, that monthly payments on FMV leases are usually lower than $1 buyout leases.

How long are the lease terms? Usually, leases for notebook computers are 24, 36, or 48 months. Some companies offer a few other options, such as 18 or 30 months. The longer your lease, the lower your monthly payments. Considering how quickly notebooks age, you might consider a 24-month lease, if you can afford the monthly payments. (A 24-month FMV lease for the $2950 notebook I mentioned earlier came out to $136 per month.)

Who owns the equipment? In some leases--technically considered capital leases--you're considered the notebook owner during the lease. Otherwise, the lessor (the company from whom you're leasing the equipment) is considered the owner, and you're technically renting the equipment. These are often known as operating leases. The question of ownership can have an impact on your tax deductions. For instance, if you don't own the computer, you can't claim its depreciation on your tax return.

What are the tax advantages? The tax advantages of leasing compared to buying a notebook can depend on the type of lease; the specific terms of the lease (whether you're considered the owner or the renter); and more. It's probably best to contact your accountant to decide which type of lease is best for you--or if you'd get better tax deductions from buying the notebook outright and, say, appreciating it on your return over several years.

Does the notebook need to be insured? Some lessors require that you insure the leased notebook. If you don't, they may add an additional fee to your monthly payment to cover insurance.

Is there an advance payment? You may be asked to make at least one monthly lease payment up front.

Can I add equipment to my lease? Most companies have no problem with this and will simply recalculate your lease payments, taking into account the additional equipment. Generally, your lease term doesn't change.

Can I end my lease early? Suppose, one year after acquiring your new notebook, you're ready to upgrade to a newer model. But your lease is for two years. Can you pay off your lease early to upgrade to the newer model? Again, it depends on the lessor and your lease agreement. Also important to ask: If you're allowed to pay off a lease early, is there a prepayment penalty? If so, how much?