Is it cheaper to buy or to rent?

Tue, 19 Jul Pre-Open

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Interest rates have been going up in recent times. Therefore it has led most of us to consider a very important question. Should we buy an asset? As cost of financing the asset has gone up, the effective cost of buying assets has gone up as well. Therefore, most people have started looking more towards renting the assets they need. Particularly when the asset needs to be used only for a relatively shorter span of time.

Renting an asset is not a new concept. Most of us have done this several times. Sometimes there is a very obvious choice between the options of buying and renting. When the time period of use is short, one may consider renting over buying. However, when the time period of use is unknown or undeterminable, this question becomes increasingly difficult to answer. Before going for what is the right answer, let us first look at the pros and cons of both the options.

Buying gives one the ownership of the asset. One can use the asset at one's will without any time constraint. In addition to this, there is greater control on the quality of the asset. But for this one needs to shell out a lump sum amount of money at one go. And here is where renting comes in as a knight in shining armor. Renting gives a way for using the asset by paying only a fraction of the total cost of the asset. In addition to this one does not need to shell out more funds for storage and maintenance of the asset when the asset is not in use. There is also flexibility of changing the asset if it is no longer economically viable to keep it.

Having said that, one must consider different factors before taking the final decision on buying or renting. Following are the some of the parameters:

Duration of use and rentals: While paying rent is fine, but one must compare the total value of rentals paid vis-a-vis the time period of holding the asset. Sometime people end up paying more as rentals than the actual cost of the asset. Therefore one must calculate all the rentals needed to be paid to use the asset on one side. And on the other side, the cost of owning the asset considering buying as well as maintenance cost.

Quality: If performance of asset is very critical and any failure would lead to loss in other related work, then ownership of the asset would make more economic sense.

People should also consider appreciation of the asset, resale value, tax benefit (in any) before reaching to the final conclusion.

Renting or buying both can serve one's purpose in an economic as well as effective way. However it is essential to note that one has to choose either of the alternatives judiciously. Both renting just for the heck of it or buying just to claim ownership can be detrimental if done without understanding the economic consequences of it.