Lease vs Buy: The Basics
First, leasing is only an option for financing brand new cars, not
used cars, although leasing of used luxury cars is available from
specialty car dealers in some cities.
Leases and purchase loans are simply two different methods of
automobile financing. Car leasing is not renting as many people seem to
think. It's not at all like apartment leasing. Although leasing is
similar to renting in some respects, car leasing and car renting are
completely different and should not be confused.
Ask Yourself These Questions
- Which is more important: Driving a new vehicle every two or three
years with no major repair risks - or driving one vehicle for many years
and assuming responsibility for all maintenance repairs after the first
years?
- Which is more important: Lower monthly payments but higher long term
cost - or lower long-term cost but higher initial monthly payments?
- Which is more important: Building ownership value and paying off
your vehicle, even though it means higher monthly payments - or building
no ownership value, with the benefit of significantly lower monthly
payments?
- Do you drive no more than an "average" amount of miles in a year - or is your mileage highly unpredictable?
- Do you take good care of your cars and maintain them properly - or do you prefer be more lax about such things?
- Do you have a stable lifestyle such that you will not want to end
your lease early - or is there a high likelihood of wanting out early?
So we find out that making a lease-or-buy decision is not quite
cut-and-dry. There are trade-offs, pluses and minuses, and pros and cons
to consider.
Let's look at how leasing and buying compare.
Buying and Leasing Compared
Lease
When you lease, you pay only a portion of a vehicle's
total value, which is the part of the value that you "use up" during the
time you're driving it.
You have a choice 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. Your next payment is due a month later. At lease-end,
you may either return the vehicle, or purchase it for the part of the
value that you haven't already paid. The purchase price is stated in
your contract at the time you sign.
If you decide to return your vehicle, you may be charged a lease-end
disposition fee, and for any excessive mileage or wear-and-tear, the
details of which are spelled out in your lease contract. Purchasing your
vehicle avoids these fees.
Buy
When you buy, you pay for the entire value of a vehicle,
regardless of how many miles you drive it or how long you keep it. You
can pay cash or get an auto finance loan.
Monthly loan payments are always higher for a loan than for
a lease - 60%-110% higher - for the same car. You typically make a down
payment of 10%-20%, pay sales tax on the full purchase price, and pay a
loan interest rate determined by your loan company, based on your credit
score. 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 or trade value, which may be considerably less than
the vehicle's original cost. The feasibility of selling or trading
before loan completion depends on your equity - your vehicle's current value versus your outstanding loan balance. If the loan balance is higher, you have negative equity - not good. Otherwise, you have positive equity - good.
Lease 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 (the depreciation), plus finance charges. This is fundamentally why leasing offers significantly lower monthly payments.
You can return the car at lease-end, or buy it for the remaining
$13,000 that you haven't already paid - or trade it if the vehicle is
worth more than $13,000. |  |
Buy Example
When you buy with a loan, you pay the entire $20,000 cost,
plus finance charges. You own the car at the end of the loan, although
its value is less than the $20,000 you initially paid - $7000 less. All
cars suffer the same value depreciation regardless of how they
are financed - purchase or lease. You have the option to sell or trade
the vehicle, or continue driving it while enjoying no further monthly
payments.
How are Car Lease and Loan Payments Different?
Here's a table that compares a typical lease payment with loan
payments for the same car, same price, same down payment, same interest
rate, and same number of months. Lease payments are 42% less. An additional comparison shows that lease payments are still lower by 36% even when compared to a 0% loan interest rate.
Lease Payments - Two Parts
Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation
part of each monthly payment compensates the leasing company for the
portion of the vehicle's value that is lost during your lease ($7000 in
our example above). The finance part (called money factor)
is interest on the money the lease company has tied up in the car while
you're driving it. In effect, you are borrowing the money that the
lease company used to buy the car from the dealer. You repay part of
that money in monthly payments, and repay the remainder when you either
buy or return the vehicle at lease-end.
Since you pay only for a leased car's depreciation (lost value), you
have nothing to show for the money you've spent. But, as we'll see in a
moment, a car buyer also loses the same value to depreciation.
Loan Payments - Two Parts
Loan payments also have two parts: a principal charge and a finance charge,
similar to lease payments. A finance company, credit union, or bank
issues money directly to you or a dealer, and you agree to repay that
money, with interest, over time. The principal part pays off the full vehicle purchase price ($20,000 in our example above) over the term of the loan, while the finance part is interest
on the monthly unpaid balance. The finance company or bank will hold
the vehicle's legal title of ownership until the loan has been
completely repaid.
However, since all vehicles depreciate in value by the same amount
regardless of whether they are leased or purchased, part of the principal portion of each loan payment can be considered as a depreciation
charge, just like with leasing - it's part of each monthly payment that
you never get back, even if you sell the vehicle in the future. It's
lost money for which you'll have nothing to show, just like with
leasing.
The Part You Lose, The Part You Keep
The other part of each loan principal payment, after depreciation, goes toward equity value.
Equity is what remains of your car's original value at the end of the
loan after depreciation has taken its toll. Equity is resale or trade
value. It's what you get back if you sell the vehicle - or credit you
receive if you trade. The longer you own and drive a vehicle, the less
equity value you have. At some point in time, after the wheels have
fallen off and the engine is worn out, the only equity left is scrap
value. You never get back the full amount you paid for your vehicle.
Savings Account or No Savings Account
So, buying a car with a loan is essentially like putting money into a
declining-value savings account - you never get out as much as you put
in. A portion of every payment you make is lost to depreciation and
finance charges. What you have "to show" for your investment when your
loan is paid off is only the part of a vehicle's value that is left over
after depreciation and interest. However, if you plan to drive the
vehicle for many years to come, its equity value at the end of your loan
is of little concern to you.
Leasing, then, is similar to buying but without the equity "savings
account." You only pay for what you use (the depreciation) and you don't
put anything extra each month into "savings." It's true that you'll own
nothing at the end of a lease; you'll have nothing "to show" for the
money you've put into it. But … what you don't own is the same part of
the car's original value - the depreciated part - that a buyer too
doesn't own at the end of his loan. Again, a car's value depreciates the
same amount whether it is leased or purchased. That money is gone
forever, lease or buy.
With leasing, you may have the option of putting your monthly payment
savings into more productive investments, such as mutual funds or
stocks that have the possibility of increasing in value. In fact, many
experts encourage this practice as one of the benefits of leasing,
although most people will typically find other uses for the money they
save by leasing - such as paying the mortgage or buying groceries.
Price is important whether you lease or buy
When leasing, it's often easy to overlook the fact that vehicle price
is important and should be negotiated just as it should if you were
buying. In fact dealers sometimes state, or imply, that price is not
important or that price cannot be negotiated in a lease. Not true. Just
the opposite. Price is the most important factor - in either a lease or a purchase - for creating a low monthly payment.
Leasing Can be a Little More Complicated
Because leasing is made somewhat more complicated with residuals,
term, money factors, acquisition fees, etc.; it shouldn't be undertaken
quite as casually as you might with a car loan. There are more
opportunities to misunderstand and make mistakes. Therefore, leasing
requires that you be more careful and more informed.
Credit Score is Important
Leasing may also require a higher credit score than a car loan.
Your score might mean the difference between leasing and buying, what
you'll pay in finance charges, how much down payment you'll be asked to
make, or not getting approved at all.
Insurance Cost Is a Consideration Too
These days, most loan and lease finance companies require you to have
full insurance coverage on your car - to protect both your interests
and theirs. Since auto insurance companies' rates for full coverage
varies so widely, it's always a good idea to do some checking around and
get quotes.
One Other Thing - GAP Protection
Most car leases have automatic built-in GAP coverage, while car
purchase loans do not. GAP coverage, or GAP insurance, pays the
difference between what you owe on your loan or lease, and what your
vehicle is actually worth if your vehicle is stolen or destroyed in an
accident.
Why is GAP insurance important? Because it's very common, in these
days of long-term loans and leases, rolled-over and refinanced loans,
and little or no down payment, to be "upside down" - to owe more on your
loan or lease than your car is actually worth.
This can mean you'll still owe hundreds or thousands of dollars to
the finance company even after your insurance has paid for your car that
has been totaled or stolen. This turns out to be a huge shocking
surprise for most people caught in this unfortunate situation.
So, nearly all leases have built-in GAP protection, but loans do not.
You're better protected with a lease, unless you purchase the insurance
separately at extra cost for the loan - if you can find a place to buy
it.
So Which is Better - Buying or Leasing ?
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:
1. 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 (see
comparison chart above).
2. The MEDIUM-TERM
cost of leasing is ABOUT THE SAME as the cost of buying, assuming the
buyer sells/trades his vehicle at loan-end and the leaser returns her
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 a bit less than buying.
3. 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 begins to exceed the cost of replacing it.
However, many automotive consumers have other more short-term objectives
that are more important than long-term cost savings.
Lease or Buy? What's Important to You? 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 or 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 at first, like owning your cars for more than
2-3 years, prefer to build up some trade-in or 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, or you might have lifestyle or job changes in the
near future - then you should BUY.
The above information was obtained from Leaseguide.com. See entire information here.