With rising car prices, creative financing has come to the forefront, tempting us with promises of zero or minimal down payments and low monthly payments. In all finance scenarios, however, some sort of fee is attached -- the question is, which financial approach best meets your needs?
Lower monthly payments and less money down can make leasing seem like a great deal. The truth is that leasing offers a lot of convenience, but only if you are willing to put up with restrictions, which can include lower mileage limits -- typically only 12,000 miles per year, sometimes 10,000 miles per year -- diligent upkeep and care of the vehicle and, in some cases, penalties for early termination.
After a lease deal is offered to you, be sure to pay close attention to the negotiated purchase price of the vehicle and any additional fees outside the lease rate, and never sign a lease contract unless the residual value or optional purchase price at the end of the lease is clearly shown.
You are a good candidate for leasing if you prefer to have a new car every few years, put limited miles on your car and/or can write off your car lease as a business expense. A quick way to find out if leasing is right for you is to take our short quiz to determine your "lease friendliness."
If you are using a lease simply to reduce the amount of your monthly payment, it may very well be that you are considering a car that, if you were to purchase it, would be outside your realistic capability to make the payments. If that's the case, you should give serious thought to selecting a less-expensive vehicle. If you abuse the opportunity the lease offers, you will pay for it in the future.
Before considering the purchase of a new car, it is wise to establish the amount you are willing to spend, or to calculate the monthly loan payment. Don't forget that, after negotiating the final price of the car, you will need to allow some extra cash to cover tax, title and in some states, registration.
Next up, arrange your financing. You may choose to obtain a loan with the dealership or go with the manufacturer's financing. But there are options. You can obtain online financing. You may be able to arrange for pre-approval of a loan from your credit union.
When you do some of these things, you may not have a specific vehicle in mind, just a general price range, and when you make the deal you write the dealership a check for the total amount. Some institutions will give you a lower interest rate if you have direct deposit and an electronic loan payment, so be sure to ask about it.
| Mileage Limitations
| Down Payment
| Purchase Price/Lease Initial Value
| Monthly Payment Taxable*
| High Insurance Coverage Required
| Can Modify the Vehicle
| Own at End of Term
Lease vs. Buy Example
As an example, if you LEASE a $20,000 car that will have, say, an estimated resale value of $13,000 after 24 months, you only pay for the $7,000 difference (this is called depreciation), plus finances charges, plus possible fees. You return the car at lease-end, or buy it to own it.
When you BUY, you pay the entire $20,000, plus finances charges, plus possible fees. You own the car at the end of your loan, although its value is less than the $20,000 you initially paid.
Lease vs. Loan
As with any question of this type, there can be more than one answer, depending on particulars. Let's simplify the answers and summarize them here:
"The short-term monthly cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying." For the same car, same price, same term, and same down payment, monthly lease payments will always be 30-60% lower than loan payments. This is still true even when compared to 0% or low-interest loans. Typical lease compared to a 6% loan and a 0% loan. Leasing always has lower payments. Does this mean leasing is always better? Not necessarily. Payment is not the only factor that should influence your decision.
|Lease - 6%
||Loan - 0%
||Loan - 6% |
"The medium-term cost of leasing is ABOUT THE SAME as the cost of buying, assuming the buyer sells/trades their vehicle at loan-end and the leaser returns their vehicle at lease-end." The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, assuming the buyer sells or trades the vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less than leasing due to fewer fees, lower total finance costs, and the assumption that a purchased vehicle will return full market value if it is sold or traded at the end of the loan (often a bad assumption, especially if traded). However, when the benefits of wisely investing monthly lease savings are considered, along with sales tax savings (in most states), the net cost of leasing can easily be less than buying.
"The long-term cost of leasing is ALWAYS MORE than the cost of buying, assuming the buyer keeps his vehicle after loan-end." If a buyer keeps his car after the loan has been paid off and drives it for many more years, the cost is spread over a longer term. It doesn't take rocket science to figure out that the cost of buying one car and driving it for ten years is less expensive than leasing or buying four or five different cars over the same period. Therefore, leasing is always more expensive than long-term buying. If long-term financial cost savings were the most important objective in acquiring a new car, it would always be best to buy the car and drive it for as long as it survives - or until the cost of maintenance and repairs begin to exceed the cost of replacing it. However, many automotive consumers have other more immediate objectives that are more important than long-term cost savings.
What Are Your Priorities
It's personal. All of us have different personal styles, objectives and priorities - in cars, life, and in finances. Car lease-versus-buy decisions must be made with your own lifestyle and priorities in mind. What's right for one person can be totally wrong for another.
Lease - If you enjoy driving a new car every two or three years, want lower monthly
payments, like having a car that has the latest safety features and is always under
warranty, don't like trading and selling used cars, don't care about building ownership
equity, have a stable predictable lifestyle, drive an average number of miles, properly
maintain your cars, are willing to pay more over the long haul to get these benefits,
and understand how leasing works, then you should lease.
Buy - If you don't mind higher payments at first, like holding on to your cars prefer to
build up some trade-in resale value (equity), enjoy the idea of having ownership of
your car, like paying off your loan and being payment-free for a while, don't mind the
unexpected cost of repairs after warranty has expired, drive more than average
miles, prefer to drive your cars for years to spread out the cost, like to customize
your cars, might have lifestyle or job changes in the near future, and don't like the risk
of possible lease-end charges - then you should buy.
To summarize, car leasing is the right answer for people who want to save on monthly automobile costs but who have a stable predictable lifestyle and take good care of their cars. Buying is better for those who drive lots of miles, like paying off their car loans and enjoying their car without monthly payments for years to come.
Remember, whether you lease of buy, or take over an existing loan, your current credit score can make the difference between a good deal or a bad deal, or no deal at all.
Information provided by www.kbb.com and www.leaseguide.com