Lease or Buy

Buy or lease, which is better? Everyone who has ever considered leasing has had this question cross their mind.

Leases and 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 downsides. It's not possible to simply say that one is always better than the other because, it depends on your own particular situation and preferences. You must not only look at the 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? Are long term cost savings more important than lower monthly payments? Is ownership more important than low up-front costs and no down payment? Therefore, making the lease or buy decision is not quite cut and dry. There are some things you need to know first.

Buying & 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. You make your first payment a month after you sign your contract.

When you lease, you pay for only a portion of the vehicle's cost, which is the part that you utilize during the time you are driving it. You have the option of not making a down payment; you pay sales tax only on your monthly payments, and pay a money factor that is similar to the interest rate on a loan. With leases, you may also pay extra 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.

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. The finance part is interest on the money the lease company has tied up in the car while you're driving it.

Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the vehicle purchase price, while the finance charge is loan interest.

However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principle charge of each loan payment can be considered as a depreciation charge, just like with leasing it's the money you never get back, even if you sell the vehicle in the future. The remainder of each loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value. It's what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have.

Lease or buy? Which is better?

So, is it better to lease, or buy? Every article, book, or web site you'll ever read about car leasing addresses this classic question.

The answer usually involves financial analysis and comparisons of the two options — typically ignoring the fact that the consumer may have interests other than overall long-term cost that can't be factored into a simple financial comparison.

Although the authors of these writings often go into great detail, providing lease-buy calculators and the obligatory side-by-side cost analysis, the answers always come out the same — though frequently presented with a biased slant that reflects the author's particular viewpoint.

Lease or buy? Let's simplify the answers and summarize them here:

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 expenses will always be 30%-60% lower than loan payments. This is still true even when compared to 0% loans.
The medium-term cost of leasing is about the same as the cost of buying, assuming the buyer sells the vehicle.

The overall cost of leasing compared to buying, over the same lease or loan term, is approximately the same, more or less, assuming the buyer sells the vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less than leasing due to fewer fees and the assumption that a purchased vehicle will return full market value if it is sold or traded at the end of the loan. However, if the benefits of wisely investing the monthly lease savings are considered, the net cost of leasing can easily be less than buying.

The long-term cost of leasing is always more than the cost of buying, assuming the buyer keeps the vehicle.

If a buyer keeps the car after the loan has been paid off and drives it for many more years, the cost is spread over a longer term. It is common logic to figure out that the cost of buying one car and driving it for ten years is less expensive than leasing or buying five different cars over the same period. If long-term financial benefits 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.

Leasing

More consumers are choosing to lease their new vehicles than ever before for the following reasons:

Payments are lower. Since you're only purchasing the right to use a vehicle for a period of time, your financial responsibility and your monthly payments are reduced significantly.

Peace of mind. Most leases last for 2-3 years, the period when a new car is most reliable and enjoys the most extensive warranty coverage.

It is convenient. When a lease expires, you simply turn your vehicle in. There's no need to worry about selling it or trading it in.

Most people who lease enjoy driving a brand new car every few years. And if you spend a lot of time on the road for business, leasing can also offer attractive tax advantages.

Financing

Most consumers still choose to finance their new cars with a loan. Financing a vehicle offers:

Once you've paid off your loan, you own your vehicle free and clear. You can keep it as long as you like, and while you'll be driving an older car you'll be free of car payments for as long as you keep it.
Leasing requires that you drive no more than a certain number of miles every year. Owning your car means you can drive it as much as you like, as far as you like.
When you lease, you're responsible for returning your car as you received it. When you finance your vehicle, you get to make your own decisions about how your car should look and how it should be maintained. If you want to put in a new stereo or take your time fixing a dent, it's your call to make.

Selecting

When you're deciding between leasing and financing, ask yourself a few simple questions:
How long do I usually keep a car?
If you tend to trade your cars in every two or three years, consider leasing. If you usually keep your cars for five years or more, consider financing.

How many miles do I usually drive?
If you drive less than 12,000 miles a year, leasing is an excellent option. If you drive more than 15,000 miles a year, it usually makes sense to finance.

How much cash do I plan to put down?
Many leases let you drive your car away without putting any cash down. Financing generally requires a down payment.

What's the difference between a loan and a lease?
When you obtain a loan for a vehicle, your down payment and your monthly payments go toward the total purchase price of your vehicle. When you have paid off the financing, you own your car.

When you lease a vehicle, you make payments to use that vehicle over the term of your lease. However, at the end of your lease, you don't own the vehicle; therefore, you return it to the lender.
How do I choose between financing with a lease or a loan?
That depends on what you want to drive, how much you plan to drive it, and how long you expect to keep it.

It may be worthwhile to lease rather than obtain a loan if:

You want the most car for your monthly payment
You drive less than 15,000 miles a year
You like to trade in your car every three years or less
Owning a car outright is not important to you.

It may be preferable to get a loan if:

Owning a car outright is important to you
You plan to enjoy your vehicle for a long time
You want to customize your vehicle
You want the maximum flexibility regarding the number of miles you drive and how long you keep your vehicle.

Typically, the monthly payments on a lease are significantly lower than if you obtain a loan for your vehicle, while having a loan gives you more flexibility in terms of ownership.