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Car Shopping  -Leasing vs. Buying.

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n order to decide whether to buy or lease a vehicle, you must understand the difference. If youíre looking to build financial equity, buying might be the best way to go. Of course, that means coming up with a large sum of money, especially when you consider the ever-rising costs of car and trucks. Leasing is a way to get into a vehicle you could never otherwise afford.

First, letís demystify leasing. When you lease a vehicle, you are NOT renting it. You are arranging for the vehicle to be sold to a leasing company, which is often a division of the manufacturer. Then the leasing company allows you to use their vehicle for a monthly fee over a determined period of time, usually around two to four years. One of the best features of leasing is that when the terms of your lease are up, you then have the option to either return the car to the dealer or BUY THE CAR for a prearranged lump sum. This sum is called the ďresidual value.Ē

What is complicated is the method employed that determines the amount of your monthly payments. When you lease a car, you are paying for the carís depreciation over the term of the contract, plus the interest, taxes, and fees. However, just like buying a car, the price of leasing is open to negotiation. It may be cut automatically with a larger down payment. You can also negotiate the upfront costs such as the acquisition fee and security deposit to get a better deal.

There are some definite advantages to leasing rather than buying. Since you are only paying for the depreciation of the car and not the full value, your monthly payments are much lower than if you were to buy. This translates to acquiring the same car but at payments around 30%-60% lower than those of loan payments.

Another advantage is that when your lease is up, assuming your car is in good condition, you will be able to stroll into the dealer, hand over the keys, sign a new lease, and drive off with a brand new car. You donít have the headaches of selling a car you purchased or haggling with a used car dealer over its trade-in value.

However, there are a number of disadvantages to leasing. Leasing doesnít give you equity, as buying a car would. With leasing, you will pay a large penalty ó as much as six months payments ó if you want to cancel your lease before the full term is up. You may pay more money by leasing a car due to extra mileage. A leasing company typically offers 12,000 to 15,000 miles per year. Most leasing companies will charge an extra twelve to fifteen cents per mile above that limit. You can arrange to buy more miles at a reduced rate (usually around ten cents per mile) when you negotiate your lease. Also, youíll have to pay for any damage to the car beyond normal wear when you return it. Finally, there is the matter of insurance. If you have an accident or the car is stolen, your insurance will only reimburse you for the carís market value ó which might not cover what you owe on the lease. You can, however, buy what is called ďgap coverageĒ to protect against the possibility of owing more money than your insurance will pay. Some leases will include it automatically.

So how do you decide whether you should buy or lease? There are some questions you can ask yourself that will make your situation clearer.

Do you need your money? If you do, then it makes more sense to lease because you will usually put down less money than if you buy. Some dealers will even waive a down payment. If you buy a car and finance it, you may be putting down 10% of the purchase price as well as sales tax. You will be building up equity, but you may be incurring problems with your day-to-day cash needs.

How often do you want a new car? If you are one of those people whose favorite weekend activity is to wax your new car to a blinding shine, then leasing is for you. However, if you foresee owning the same car for seven years or more, youíll save significant money buy buying. When you lease, you give up your car just when depreciation slows, and, under long-term financing, equity begins to build. Donít lease if you like to buy a new car every year. Buying allows you to purchase a new car impulsively (like, for instance, when you suddenly find yourself the chief beneficiary of your great auntís multi-million dollar estate). Buying also allows you to put off a purchase if your income suddenly drops.

How much do you drive? Leasing is ideal if you normally drive around 15,000 miles per year and keep your car maintained. If, however, you drive significantly fewer miles per year, you may be paying for depreciation you are not causing. In that case, buying might be the better option. 

Do you use your car for business purposes? If your car costs are a business deduction, you will do substantially better by leasing. The interest paid on car loans is NOT deductible. When you lease, you can deduct the depreciation as well as the financing costs. However, the IRS limits depreciation deductions on certain luxury cars.

Do you worry about your carís resale value? If you regularly drive a car full of kids, have several eighty-pound bloodhounds (notorious for drooling), or fill the backseat every weekend with lumber, lawn equipment and tools, you will probably inflict some damage on the carís interior. If you lease, you will have to pay for this damage when you turn in your car. If you keep your car in immaculate condition, you might want to consider buying ó you can build up equity and take advantage of its mint condition and any improvements you may have made when you decide to sell it. Do keep in mind that leasing allows you to lock in a resale value, which will provide you with a certain amount of security.

How settled is your life? If there is the possibility of a move, a new job, or any other life-changing event, buying is a much better choice. When you turn in a leased car early, you are typically liable for all the remaining payments minus the amount for depreciation that hasnít happened yet.

Finally, how much do you trust the company you are leasing from? When you buy a car, you donít have to worry about the bank  ó just about owing a lot of money to that bank! Leasing means you are entering into a complex financial arrangement with a company. Try to lease from a company with a strong interest in repeat business, and check the terms of your lease thoroughly, particularly for gap coverage which protects you if your car is lost or stolen. Make sure you have a purchase option at a fixed price. DONíT LEASE FROM COMPANIES THAT DONíT OFFER THESE OPTIONS.

This may seem like a lot to take it, but acquiring a new car is one of lifeís major purchases. Give it the time and research it deserves, and save yourself a lot of trouble in the future.

Also see:

Financial Automotive Articles

How to Preserve your Car's Resale Value -What are the most important items to consider in order to maintain your resale value?

How Well Do You Know the Warranty on Your Car? -Dig that warranty out of the glovebox and check on these important facts.

Avoiding Car Sales Scams: The New Car Buying Process -learn about negotiating and other important tips.

No Lemons Wanted- Used Car Buying Tips  -find a great used auto without suffering through a lemon.

 

This webpage is brought to you for general information purposes only and there are no warranties as to accuracy, completeness, or results obtained from any information posted on this or any linked website.


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