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Leasing vs. Buying a Car

Leasing vs. Buying a Car

The Basic Question: Should I Buy or Lease a Car?

One of the most fundamental questions attached to the car-purchasing process revolves around buying vs. leasing. Granted the answer to this question will vary based on individual circumstance. However, knowing the basic features of each transaction will illuminate the better route. 

Conventional wisdom dictates that if you lease a vehicle you will have nothing to show for the money you put in when your term expires. This basic principle; however, ignores the opportunity costs inherent in financing or buying an automobile: the funds you pay up front for the vehicle could be used for something else that makes you happy. 


Advantages to Leasing a Car:

Low Down Payments: You undoubtedly see at all the time on commercials and in periodicals: leasing provides you with better deals regarding the amount you actually pay out of pocket per month. In addition, these deals may or may not be offered without a down payment. This is a considerable advantage for some deciding whether to buy or lease a car—all financing packages (all individuals who buy a car) are required to put a minimum percentage down. The lack of down payment offers an individual the ability to withhold a considerable amount of funds at the time of purchase/lease. 

Lack of Commitment: Leasing is synonymous with renting a vehicle. When you lease a vehicle you are not committed to owning it long-term—typically leases last between 2 and 4 years. When the lease ends, you will have the option to either purchase the car or walk away. This option gives you the ability to either stick with your car or search for a new one. You will not be stuck into a commitment that you do not want. Low Monthly Payments: Because you are only paying off the depreciation of the vehicle in a lease contract and not its full value your monthly payments will be much lower than if you choose to finance the purchase of the entire car. Lower monthly payments are also realized in a lease agreement because you are only paying for a portion of the car over the same timeframe as a financing contract. 

Easy Turnover: Assuming the vehicle is in good shape, when your two to four year lease ends, you can just go to the dealer, hand them the keys and drive out with a brand new car under a new lease agreement. With a lease, you do not have to bother with selling the vehicle or haggling with the dealer over its trade-in-value. In summation, a lease arrangement offers you flexibility and convenience. Financially; however, it isn’t the wisest decision. 


Disadvantages Associated with Leasing a Car:

No Equity: This is easily the biggest advantage when deciding whether to lease or buy a car. Leasing a car is like renting an apartment; when the lease is over, you don’t own anything. Dissimilar to financing, you can’t look forward to owning the car when you have fulfilled the loan obligation. The residuals may prove costly; the flexibility and lower monthly and down payments are met with a lack of ownership once the lease ends.Huge Penalties Associated With Opting Out: If you wish to opt out of the lease agreement before the full term you can expect to get hit with a massive penalty. Bailing out of the agreement may cost you up to six extra months of payments depending on your lease agreement. 

Extra Payments towards Miles: A lease agreement is attached with special clauses that charge you for going over a certain number of miles per year. The majority of lease arrangements will charge an additional 12 to 15 cents for each mile you drive over a certain limit. Typically, the agreement will grant you 12,000 to 15,000 miles per year. So, if you take a 3-year lease with 15,000 miles per year and return the car at the end of the arrangement with 52,000 miles you will be docked for the 7,000 miles you went over. Also, you will be forced to pay for any damage to the car beyond normal wear and tear when you turn it in. Although you will be given the opportunity to purchase more miles at a reduced rate up front, these additional penalties can prove disastrous. Remember, you don’t own the car when the lease is up so any damage or excess driving will prove costly. 

Problems with Insurance: If you get in a severe car crash or your vehicle gets stolen, your insurance coverage will only reimburse you for the market value of the car. This figure may not cover what you still owe on your lease. You may buy extra “gap coverage” to protect against this instance. 


Questions You Must Ask Yourself When Deciding Whether to Buy or Lease a Car?

How Badly Do You Need Your Cash?

Leasing makes sense if you need cash. A lease arrangement requires a fraction of the money down than financing a vehicle—in many cases a dealer will not require a down payment for a lease. A typical lease will only require between $1,000 and $2,000 for fees, the first month’s payment and a refundable security deposit. 

When deciding whether to buy or lease a car, remember that a dealer wants you to lease the automobile—they would rather rent out their assets and then flip them when they are returned. Because of this, the dealer will often work with you when negotiating the terms of a lease. 

When you finance a car you could easily be forced to put 10% down and then pay an additional 6% to 8% sales tax—you are forced to pay more for the equity of the vehicle. Therefore, if you need the cash, you should lease the vehicle. If you are a prudent long-term buyer you should finance the vehicle. 


How Often Will You Want a New Car?

Leasing is particularly attractive for buyers who want a new car every three years or so. Leasing saves you the hassle of selling a car, which in turn, allows you to seamlessly move from vehicle to vehicle with lower monthly and down payment obligations. Therefore, when deciding whether to lease or buy a car, you must forecast your wants over the next few years—if you stick with a car or really like a specific car you should finance; if you like updating your vehicles you should lease. 

How Often do You Drive?

This question must be asked when deciding whether to buy or lease a car. Always check your odometer; an ideal lease customer will drive roughly 15,000 miles a year and keep good care of their automobile. If you drive less than this, you will be paying for depreciation that you are not causing. In this instance, you should opt for purchasing the vehicle. In turn, if you drive substantially and prefer to lease, you must negotiate the cost of the additional miles before affirming the arrangement. Remember, all dealerships will charge for over-the-cap miles, so be prudent when driving and be smart when negotiating for more miles. 

Will Your Car Be Used For Business Purposes?

If your car is being used for business reasons, you may deduct a portion of the vehicle’s depreciation from your taxes—you will be able to deduct more if you lease. Interest paid towards loans to purchase a vehicle is not deductible.

Do You Care About Resale Value?

If you use your car a lot, if it is susceptible to a lot of wear and tear, leasing may not be best for you. By Contrast, if you take exceptional care of your car, you should also consider buying it, to maximize the equity and take advantage of selling it. If you want to recoup some of the money you invested into the vehicle, you must finance the automobile. 

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