Quick Comparison of Leasing vs. Buying

Deciding whether to lease a car or purchase a car can be a difficult decision at times.  More consumers generally understand the terms involved in car loans and car purchases than they do in car leases.  There are some basic standards to leasing that may have benefits or disadvantages depending upon your budget and needs.  The basic principle of buying a vehicle, either with cash outright or with a loan agreement also has benefits and disadvantages depending on your budget and needs.  Leasing a car is certainly not the right decision for everyone and a consumer’s decision should take into consideration several factors.

With a car lease, you pay only for what you use of the vehicle.  The most frequently given advantages of leasing are that leases require a lower initial cash expense, the monthly payments are often lower than that of a car loan, which leads to the conclusion that you can also often get more vehicle for your money.  Common disadvantages are that at the end of the lease you don’t own the vehicle and have no equity, and you may get charged for excess miles driven and excess wear and tear on the car.

The fundamental model for evaluating a car purchase is based on the concept that you have or are building equity with a car loan toward ownership.  The main advantage is that you own the vehicle and hold its residual value after all the payments are made.  The main disadvantage is that by the time you actually own the car outright, it may have cost you far more than the vehicle is worth.

Based on this overview of the two methods to obtain a new car it is important to fully understand the differences between a closed end lease and buying a car.  Some simple highlights between the two methods of obtaining a car can help a consumer understand what they can get, how it may impact the cost of the car and what process is best for them.  The information should help any consumer better compare lease offers and car loan terms as well as help negotiate a lease that will best fits the individuals needs and budget.

The comparison information is for a closed-end lease.  The closed end lease is the most common type of vehicle lease.  In a closed-end lease, the individual leasing the car may return the vehicle at the end of the lease term, pay any end-of-lease costs, and walk away.

The main difference between the lease and the car purchase is that you do own the vehicle with a lease.  With a lease you must return the vehicle at the end of the lease unless you choose to buy it within the terms of the buy out provision in the lease contract.  When you purchase a vehicle, you will own the car and get to keep it at the end of the loan term if you use a car loan to help make the purchase.

Generally, the up front costs fro a lease will include a refundable security deposit, the first months payment, an amount called the capitalized cost reduction which is similar to a down payment and usual transfer charges such as taxes, registration and other related fees.  For a car purchase the usual charges are the down payment, taxes, registration fees and other related fees.

As a rule of thumb, the monthly lease payments will usually be lower than monthly car loan payments.  This is because; in a lease you are only paying only for the vehicle’s depreciation during the term of the lease, plus the cost to rent the vehicle, similar to paying interest on a loan and the taxes, and fees.  Since you don’t own the car, the lease monthly payments do not have to reflect the full value of the vehicle.  The car goes back to the dealer at the end of the lease term.  For the purchase, the car loan payments with the down payment have to reflect the total cost to acquire the car.  At the end of car loan term, you own the value and its remaining value.  Therefore, with the car purchase the monthly loan payments are usually higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees.

If you want to end a lease early you will responsible for any termination charges to get out of the lease contract.  With the car loan you can end the loan terms by paying off the loan balance even by selling the car if necessary.

At the end of a lease term, you will have the ability to return the vehicle, pay any end-of-lease costs, and walk away from the car and any additional costs.  Of course, at the end of the lease you may have a new payment either to finance the purchase of the existing vehicle or to lease another vehicle.  This allows you the opportunity to easily change cars.  With the purchase, you own the car and its residual value but you may have to sell or trade the vehicle in when you decide you want a new car. At the end of the loan term of any car loan you may have had, you have no further loan payments.

The cost of the lease essentially transfers the risk regarding the future value of the car to the lessor, either the car dealer, manufacturer or leasing company.  It’s not the individuals concern over what the car is worth at the end of the lease term.  These factors are computed to come up with the lease payment amount.  When you purchase the car, you have the risk of the vehicle’s market value when you trade it in or sell it

Leases will have limits on mileage and vehicle damage.  Most leases limit the number of miles you may drive common figures are 12,000-15,000 miles per year.  You can negotiate a higher mileage limit which will generally involve paying a higher monthly payment.  The lessor will be responsible and have to pay extra costs for mileage that exceeding those limits when you return the car.  With the car purchase, the owner can put on as many miles as they want.  The higher mileage may impact the cars trade in value or resale value later. 

Most leases also will limit the amount of wear to the vehicle during the lease term.  There will generally be extra charges you will have to pay for exceeding those limits on vehicle wear when you return the car.  For the car buyer, with or without a car loan, there are no limits or added costs for excessive wear to the car.  Similar to excessive mileage, the added wear to a car will lowers its resale value or trade in value later.

Final considerations for the consumer on whether to purchase a car or lease a car include how long they like to keep their car, how many miles someone typically drives their car each year, how much money they want to make available for the initial payment, and how much they may value ownership or equity of in the car.

Tags: buying a car, car, car leases, car loan payments, car loans, car purchase

This entry was posted on Thursday, May 7th, 2009 at 9:49 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.