Car Coach: Buying vs. Leasing

Buying vs. Leasing

If you own a car or have read Car Coach, you likely understand buying a car. You also need to understand leasing. When you lease a car or truck, you do not buy it. A lease is a long-term rental agreement. The leasing company holds the title to the vehicle. You are paying for the difference between the value of the car when the lease begins and the estimated value at the end of your lease. Your lease payment covers many expenses: depreciation on the car, interest and overhead charges, and sales taxes and fees.

The starting value of the vehicle, the equivalent of the purchase price, is known as the capitalized cost. The rent charge covers the cost of money that the lessor has spent to buy the vehicle and also covers profit that the lessor has to make to pay overhead and stay in business. The fixed value for the vehicle at the end of the lease is called the residual value. Most leases give you the option to buy the car or truck at lease end, usually for the residual value or a price close to it.

You can reduce your monthly lease payments by getting a lower capitalized cost, a higher residual value, or both. Some lease deals involve capitalized cost reduction, which is equivalent to a down payment -- it reduces the monthly payment. A manufacturer may offer lease incentives by inflating the residual value. Unless there is a special lease incentive, vehicles that hold a high resale value make better leasing candidates than those that depreciate more rapidly

Leasing contracts call for the lessee to keep the car in good condition. That means having all factory-required maintenance done on time and avoiding cosmetic problems such as parking lot dings, scratches, nicks and chips. When the car is turned in, it is closely examined for "excess wear and tear" such as tires that have worn tread, broken or missing accessories, stains, windshield issues, damage to lighting system lenses, etc. Many lessees end up paying for excess wear and tear at the end of the lease. Leasing presents a problem for people who absolutely, positively have to cancel the contract before it expires. Penalties can be severe even if termination is involuntary, as it would be if the car were stolen and never recovered or declared a total loss after a crash.

The capitalized cost is as subject to negotiation as the purchase price of a new car -- so it's a good idea to shop around for the best purchase price first. Discounts in the capitalized cost should not affect residual value -- in fact, residual value isn't negotiable. The leasing company uses its experience or an outside authority to set it. You can compare the charges for rent -- it is determined by the price of money and to some degree by your credit history. Look carefully at inception and disposition fees -- they can add up and significantly increase your costs.

The monthly payment for a 3 year lease may be about the same as the monthly payment for a 5 year loan. Don't be confused -- after a lease ends, you need to lease or buy another vehicle; you do not own the car! After you pay off a loan, you own your car and can use it for many years without monthly payments, trade it in as a downpayment for another car, or sell it for cash. New cars and trucks depreciate rapidly during the first two or three years -- then the rate of depreciation drops significantly. Lease a car for 2 or 3 years and you'll pay for depreciation, just as if you bought it. Then when you take out another lease, you will pay high depreciation on the next leased vehicle. If you buy a car, you decide how long you'll keep it. If it works well, you can hang onto it for 6 or 7 years or longer. Every year you own it, you pay less for depreciation and have a lower cost per mile.

When you lease, you are driving someone else's car. All contracts limit the number of miles you can drive per year, typically 10,000 miles or 15,000 miles. You might think you know how many miles you will drive over the lease term, but circumstances can and do change -- taking a new job with a longer commute, for instance. Many lessees exceed the mileage limit. There are provisions in the contract that specify how much each extra mile will cost -- typically between 15 cents and 17 cents. Many lessees with low miles-per-year limits exceed the mileage limit, requiring them to pay for extra miles.

To Buy or to Lease?

You May Be Attracted to Leasing if You:

want a new car every 2-3 years
don't like coming up with a down payment
take good care of your vehicle
drive a predictable number of miles per year
hate the idea of disposing of your old car

You May Want to Avoid Leasing if You:

keep a car for a long time
tend to drive many miles
don't always maintain your car as well as you should
have pride of ownership
don't care about driving a new vehicle
want the lowest cost per mile

You need to upgrade your Flash Player to see the slideshow.

about us