Buying Vs. Leasing: What Should You Do?

Money, money, moneyShould you buy or lease? Most of us have made a decision between paying rent and having a mortgage; and although buying or leasing a new car or truck involves a completely different type of calculation—a steeply depreciating item (car) versus a hopefully appreciating one (house or apartment), there are some parallels.

Just as with that decision about where you live, whether you drive a vehicle that's bought or leased should depend upon your needs, circumstances and your financial position.

On very simplistic terms, leasing could be seen like renting; you pay a monthly fee to use it but don't own it, and aren't making payments toward ownership. The leased vehicle remains the property of the lessor (the company that issued the lease). As with an apartment rental contract, a lease will have a fixed period—typically two or three years, though there are longer terms.

Too, you're obliged to make monthly payments for the length of the contract, and while you can get out of the lease before then if you want to, there will be extra costs — an "early termination charge" — typically spelled out in the contract you sign. And as is often the case with renting an apartment, you'll likely have to put down some cash as "security deposit" at the lease inception. This money will be used to pay for any damages to the vehicle—such as door dings, stains on the seats, any needed service work, etc.—when you return it at the end of the lease.

Why lease?

If you don’t own it and still pay for, why lease in the first place? The big advantage is, of course, flexibility. You aren't making a long-term commitment. When the lease period is up, you can simply bring the car back and walk away, or you can buy it if you like by paying off the remaining balance—called the "residual value"—which you'll negotiate in advance at the time of lease inception.

Also, since you are only effectively renting the car, your total cash outlay should be much less. You won't have to make as large a down payment (a security deposit and the first month's payment are typical) as you would if you were buying. And monthly lease payments are almost always less than payments would be if you bought the car—which means you’d have more money in pocket to spend on other things.

Or, if you prefer, you can usually afford to drive a more expensive car when you lease, since the monthly payments will be comparatively lower. This is one of the biggest single attractions of leasing for many people. A car (or truck) that might cost you $500-$600 per month to buy could be $100 per month less to lease.

Another benefit of leasing is that you're always driving a new or nearly new vehicle, and you won't have to worry about the major repair and maintenance problems that inevitably crop up as a car ages and gets out of warranty. The leased car will typically be under factory warranty for the duration of the lease, and many lease contracts have add-on provisos that cover routine maintenance, such as oil changes, etc. It's highly unlikely you'll have to put in a new transmission or anything like that outside of the warranty.

And for business users, leasing may also have tax advantages. In the past, leases were entered into almost exclusively by people who used their vehicle for business, and who therefore could claim deductions not available to those who purchased them outright. Consult your accountant about specific deductions. Also talk to your financial planner, if you have one: Leasing had the additional attraction of freeing up assets for investments and so on that would otherwise be locked into a depreciating asset—the person's car or truck.

When buying makes more sense

There are downsides to leasing, of course. Since you're only making what amount to rental payments each month, you won't have anything tangible to show for your money at the end of the lease. A person who buys his vehicle, on the other hand, has the comfort of knowing that one day, it will be paid for and, assuming it is still in good shape at that point, will be free transportation until it breaks down or the owner decides to get rid of it.

In addition, a person who owns his car has equity (value) in the car or truck. Even though it will depreciate with each passing year, so long as it's still serviceable transportation, it will always be worth something. That value can be used as a trade-in, or the vehicle sold privately to help raise money to pay for a new one or some other need. The person who leases must start from scratch every time.

There's also the mileage issue. If you lease, your contract will typically stipulate the maximum number of miles you're allowed before the end of the lease. If you exceed the figure, it can get very expensive. Per-mile charges over the stated maximum are often exorbitant -- so if you drive more than about 12,000 miles annually, leasing could be a terrible move for you financially. Be extremely careful about this. The person who owns his car, meanwhile, can drive it as much as he wants, and do pretty much whatever he feels like with it, too. He can swap out the stereo, add different wheels and tires, change the exhaust system, whatever. Do this with a leased car and you'll have to pay whatever if takes to put the car back the way it was. If you own your vehicle, the inevitable door dings and dents can be shrugged off. People who lease their vehicles, on the other hand, can expect to be charged for every nick, tear or spill at the end of the lease.

Leasing is also more complex than buying, and people who don't understand often-inscrutable financial language can find themselves on the short end of the stick. Always closely read and be sure you understand every proviso of the lease contract before you sign. Consider all the angles before you decide, and remember the following tips:

Short-termers should lease. Consider a lease if you get a new car more often than once every three years; if you plan to drive your next car longer than three years, buy it. New cars and trucks depreciate (lose their value) rapidly; therefore, buying a new one every 2-3 years is a certain money-loser. Leasing will almost always save you money. On the other hand, a new car can be expected to last reliably with proper car for at least 8-10 years and 100,000-plus miles. If you keep the car long enough, it will pay for itself—and you will save money over the long term.

Price it carefully, even if you lease. Whether you lease or buy, the ultimate costs will be based upon the agreed-upon sales price of the vehicle. In a lease, this amount is called the "capitalized cost" -- but it's essentially the same thing as the sales price of the car. Don't be put off by the intimidating verbiage; you negotiate the "cap cost" in the same way you'd negotiate if you were buying rather than leasing. ("Cap cost reduction" is the price of the vehicle after you factor in any trade-in or cash down, etc. The "adjusted capitalized cost" will be the final figure upon which your monthly lease payments will be based.)

Never tell the salesman whether you will be buying or leasing until after you have negotiated the price—or "cap cost"—based on dealer invoice vs. the MSRP sticker price, and factoring in all rebates, discounts, etc. Concentrate on getting the best price first; worry about whether to lease or buy after you've done that.

Shop around for financing. As with buying a car or truck, it pays to consider several lenders before you commit. Banks, credit unions, even the financing arms of the automakers themselves often have varying rates and deals. Your credit rating will affect what you pay, but don't be too eager to accept the first deal that comes along or take whatever the dealer offers. Ideally, arrange your financing before you begin the process of actually buying (or leasing) the vehicle; this way, you'll have eliminated one more variable and possible source of confusion (and possible rip-off) and can concentrate on the actual deal itself. Many people who are good negotiators get tired after hours of haggling, and when faced with the second-tier task of arranging financing, often accept whatever's put before them. Don't get caught in that trap.

Choose open or closed. A closed-end lease is simply one in which you are not responsible for any additional charges at the end of the lease period in the event the vehicle's actual market value has plummeted faster than the stock market in 1929—which happens fairly frequently. Fortunately for consumers, almost all leases these days are closed-end leases, so you'll rarely have to worry about this one.


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