Is Leasing Right for You?
If you’re uncertain about leasing or purchasing your next vehicle here are some
questions that may help clarify your decision:
Do you change vehicles frequently?
If you like to keep your car or truck and drive for “free” once you’ve made your
last payment, then leasing may not be the right solution for you.
It may actually be better to negotiate carefully, and purchase the car. Though the
payments will be higher during the term of the loan, once you’ve made your last
payment the car is yours to keep and drive as long as you want.
Are you OK with monthly payments?
If you’re comfortable with always having a car payment leasing is a good option.
Leasing allows you to make the payment lower than if you were purchasing the vehicle.
How secure is your financial situation?
If you decide to purchase a car, then have trouble making payments, you may have
to sell it to pay off the loan. If you decide to lease a car, then encounter difficulty
making payments, it is more difficult to return the car. Many leases have heavy
penalties for early termination.
Leasing is the safest option for those who have secure jobs and are in good financial
shape.
The number of miles you drive?
Regardless of whether you decide to lease or purchase your next vehicle, it’s important
to determine the number of miles you plan to drive per year. Mileage will impact
your vehicle’s overall value, especially if you’re thinking of leasing your next
vehicle.
Most leases are based on the assumption you’ll drive no more than 12,000 (in some
cases up to 15,000 miles) per year for the duration of the lease. If you go over
there are penalty charges for each mile you drive over the limit.
If you have a long commute to work and/or frequently take long road trips, leasing
may not be the best option for you. Some finance companies offer you the option
to purchase additional miles, but this can be costly and negate the money you saved
by choosing to lease rather than purchase in the first place.
Do you want a more car for less money?
Leasing affords you the ability to drive more car for your dollar. If you need a
larger car because you have a big family, something more luxurious because you spend
a lot of time in traffic, or you’re just the kind of person that likes to have nice
things, leasing is probably for you.
There may be tax advantages to leasing
If you’re planning to drive your leased vehicle for personal use there generally
are no tax breaks. But, if you are using your leased vehicle as part of your business
travel, there might be tax advantages. For example, you may be able to deduct part
of your monthly payments on your income tax. It may be worth talking to your tax
advisor for additional details.
Lease vs. Buy: Which is right for you?
Does leasing make sense?
If you’re like most people, deciding to lease or purchase a car is a major decision.
As such, it makes sense to take your time when making a decision. Smart leasing,
as anything else requires patience and knowledge. Consider your budget, your lifestyle
and what is most important to you in a car and make the decision that fits your
needs best.
Purchasing is different from leasing
If you decide to purchase a vehicle you own it in full. This usually entails making
a down payment, paying sales taxes and paying an interest rate dependent upon your
credit score. You pay for the vehicle monthly, but are not restricted to the number
of miles you drive each year. Once the loan is paid off you can continue to drive
the car for free and you will only have to pay for pay for maintenance and repairs.
If you decide to lease a vehicle you only pay for a portion of the vehicle’s total
cost. You have the option to make a down payment, which reduces the vehicle’s capitalized
cost and lowers your monthly payment further. Sales tax still applies, but it is
figured on your monthly payment, rather than on the total value of the vehicle.
Your lease may also include inception fees and, possibly a security deposit. You
must also be prepared to make the first payment when signing your lease agreement.
What makes up the lease payment?
The lease payment is made up of two components: the depreciation charge, and a finance
charge.
The depreciation is based on how much value the vehicle loses as you drive it. This
compensates the leasing company for the loss in vehicle’s value, for effectively
lending it to you.
The finance portion is the interest accrued on the money the finance company has
tied up in the car while you’re driving it. In effect, you are borrowing money that
the leasing company used to buy the car from the dealership. You pay the remainder
when you either buy or return the vehicle at the end of the lease.
What makes up the loan payment?
The loan payment is made up of two components: a principal charge and a finance
charge.
The principal goes toward equity. It is otherwise known as the value that remains
in your car at the end of the loan after depreciation. Equity is resale value. It’s
what you get back if you sold the car.
The finance pays for the interest on the loan.
Leasing is more complicated than owning
Leasing involves more complicated variables such as residuals, and money factors
and should not be entered as casually as you would a simple loan. There are more
opportunities to misunderstand and to make mistakes. Leasing requires you to be
more careful and more informed than when purchasing.
What is lease-to-own?
Many people enter leases with the intention of buying the car after it ends, or
even before the end of the lease. This is usually a more expensive means of ownership
than simply buying outright from the very beginning. Though you may have a good
reason for leasing-to-own, such as taxes – be careful.
Which is better, leasing or purchasing?
This is a very personal decision. It depends on what is important to you.
If you prefer to drive a new car every two or three years, want lower monthly payments,
don’t care for ownership, and are not inhibited by limitation on number of miles
driven – leasing may be a viable option.
If you are able to afford a higher monthly payment, prefer to build up equity, like
the idea of ownership, and don’t mind the cost of ownership once the loan is paid
off and the warranty has expired – then purchasing the vehicle may be a viable option.
Cost based analysis
The short-term benefit of leasing is that it costs 30%-60% less when compared to
the cost of purchasing.
The medium-term cost of leasing is about the same as the cost of purchasing. (Assuming
the buyer will sell or trade their car at the end of the loan.)
The long-term cost of leasing is much greater than the cost of purchasing. If you
keep the car after the loan is paid off you can continue to drive it without additional
monthly payments. This can save thousands of dollars per year.
Short-term leasing will always be more expensive when compared to the long-term
costs of purchasing.
