LEASE VS. BUY
It's a common dilemma: lease versus buy — to lease a car or buy a car — which is better?. Everyone who has ever considered leasing has had this question cross their mind.
So what is the answer?
Lease Versus Buy?
The answer is – it depends. It's not possible to simply say that one is always better than the other because the answer depends on the specifics of each individual situation.
Leases and purchase loans are simply two different methods of automobile financing (leasing is NOT renting). One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.
When making a 'lease or buy' decision you must look not only at financial comparisons but also at your own personal priorities — what's important to you.
Is having a new vehicle every two or three years with no major repair risks more important than long-term cost? Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment? Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years?
So we find out that making a lease-or-buy decision is not quite cut and dry. There are some things you need to consider. Let's take a look at some of these things.
Buying And Leasing Are Different
When you buy, you pay for the entire cost of a vehicle; regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the vehicle for its depreciated resale value.
When you lease, you pay only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. Leasing is not the same as renting. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit that you don't pay when you buy. You make your first payment at the time you sign your contract — for the month ahead. At lease-end, you may either return the vehicle, or purchase it for its depreciated resale value.
Buy vs. Lease 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 $7000 difference (this is called depreciation), plus finance charges, plus possible fees.
When you buy, you pay the entire $20,000, plus finance charges, plus possible fees.
This is fundamentally why leasing offers significantly lower monthly payments than buying.
Leasing Can Be A Little More Complicated
Because leasing is somewhat more complicated; with residuals, money factors, etc.; it shouldn't be undertaken quite as casually as you might with a simple loan. There are more opportunities to misunderstand and make mistakes. Therefore, leasing requires that you be more careful and more informed.
So, Which Is Better, Lease Or Buy?
It depends on what's most important to you. All of us have different lifestyles 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 monthly payments, prefer to build up some trade-in or resale value (equity), like the idea of having ownership of your car, prefer 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, expect lifestyle changes in the near future, and don't like the risk of possible lease-end charges — then you should buy.