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Do Not Buy a Depreciable Asset, Lease it!



Dear Speculators,

We all need to buy some important assets during our lifetime. Sometimes when the need arises, we are without sufficient cash and we need to borrow to acquire such assets for example cars, gadgets, etc. Quantum leaps in technology have continued to make assets like phones, computers, television, internet data etc cheaper and better. As such it will be somewhat unwise to purchase an asset which will immediately start losing value by paying in installments or with a loan. In essence, you will be paying more for an asset which is losing value. You must note that when we purchase certain items like vehicles with a loan for personal use, it produces no returns for the owner but only yields personal satisfaction. These loans bear interest rates and since you will be paying more for the depreciable asset with borrowed capital, it simply means you are spending more to get the same satisfaction. This utility will fall gradually as the asset wears over time.

Capital expenditure is an exception because it is able to produce returns for its owner. Any purchase as such can be categorized as an investment. Examples of capital expenditure are plants, machinery, equipment, amongst others necessary for business operation. Financing such investment with a loan is only reasonable if the return on investment (ROI) is considerably higher than the cost of capital.

Therefore, if you must purchase any asset for personal use, please pay with cash not credit. If the asset is a depreciable asset and there is a possibility that such asset can be leased, then lease it instead. This way you have the freedom to enjoy benefits of the latest technology without losing much. You save yourself from paying excess tax and you lose nothing when the assets start to depreciate. Only capital expenditure with a higher ROI than the market interest rate should be financed with a loan! An intelligent consumer will always prefer to lease than to buy if the assets do not have appreciating value.


Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

Comments

  1. Unknown22 March 2016 at 13:18

    Nice work emeka. Keep this good work up. Am personally benefitting from these. Please more of it coming. Much thanks for the ones you shared already

    ReplyDelete

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