To lease 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. 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.
First, it's important to understand that buying and leasing are fundamentally different, not just two versions of the same thing.
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 for only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax, 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 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, trade it, or purchase it for its depreciated resale value.
Buy Versus Lease Example
As an example, if you lease a $20,000 car that will have, say, an estimated resale value of $11,000 after 36 months, you pay for the $9,000 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.