Lease vs Buy Explained

Which is Better: Leasing a Car or Buying a Car?

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, which we will explain further.

Leasing a car is a great option for some people, but not for others. Some will not qualify because of credit, income, or other requirements. Therefore, if you are considering leasing, it’s important to know how to determine if a lease is a good option for you, or if you qualify.

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

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.

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.

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.


Category: Credit

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