It's a common dilemma: lease versus buy - 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?
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.
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.
making a 'lease or buy' decision you must look not only at financial
comparisons but also at your own personal priorities - what's important
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 now.
it's important to understand that buying and leasing are fundamentally
different, not just two versions of the same thing.
Buying and leasing are
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 only on your monthly payments (in most
states), 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 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 - for the
month ahead. At lease-end, you may either return the vehicle, or
purchase it for its depreciated resale value.
Buy vs lease example
an example, if you lease a $20,000 car that will have, say, an
estimated resale value of $13,000 after 24 months, you pay for the $7000
difference (this is called depreciation), plus finance charges, plus
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.
How are lease and loan
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. In effect, you are borrowing the money
that the lease company used to buy the car from the dealer. You repay
part of that money in monthly payments, and repay the remainder when you
either buy or return the vehicle at lease-end.
also have two parts: a principal charge and a finance charge, similar to
lease payments. The principal pays off the full 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 principal charge of each loan
payment can be considered as a depreciation charge, just like with
leasing - it's money you never get back, even if you sell the vehicle in
the future. It's lost money for which you'll have nothing to show.
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. At some point in time, after the
wheels have fallen off and the engine is worn out, the only equity left
is scrap value. You never get back the amount you've paid for your
versus lease - savings account or no savings account
buying a car with a loan is essentially like putting money into a
declining-value savings account - you never get out as much as you put
in. A portion of every payment you make is lost to depreciation and
finance charges. What you have "to show" for your investment when your
loan is paid off is only the part that is left over after depreciation
and interest. A terrible investment by any measure. But cars are not
usually purchased as investments, are they?
Leasing, then, is
similar to buying, but without the equity "savings account." You only
pay for what you use and you don't put anything extra into "savings."
It's true that you'll own nothing at the end of a lease; you'll have
nothing "to show" for the money you've put into it. But... what you
don't own is the same part of the car's original value - the depreciated
part - that a buyer too doesn't own at the end of his loan. Again, a
car's value depreciates the same amount whether it is leased or
purchased. That money is gone forever, lease or buy.
leasing, you may have the option of putting your monthly payment savings
into more productive investments, such as mutual funds or stocks that
have the possibility of increasing in value. In fact, many experts
encourage this practice as one of the benefits of leasing, though most
people will typically find other uses for the money they save by leasing
- such as paying the mortgage or buying groceries.
leasing typically does not build equity, while buying does. The reason
that a buyer has equity at the end of his loan is that he purchases that
equity by making higher monthly payments. Part of each payment funds
the equity. Leasing - lower payments, no equity. Buying - higher
payments, partial equity.
Leasing can be a little more complicated
leasing is somewhat more complicated; with residuals, money factors,
etc.; it shouldn't be undertaken quite as casually as you might with a
simple loan. There are more opportunities to misunderstand and make
mistakes. Therefore, leasing requires that you be more careful and more
This is precisely the reason we've provided this Lease
Guide and our optional Lease Kit - to make leasing as easy as possible
comment on lease-to-buy plans
Some folks lease with
the intention of buying their vehicle at the end of the lease, or
before the end of the lease. This is nearly always more expensive than
simply buying outright. However, you may have a good reason for this
tactic. Just be aware that it costs you more in the long term.
One other thing - GAP coverage
car leases have automatic built-in gap coverage, while car purchase
loans almost always do not. Gap coverage, or gap insurance, pays the
difference between what you owe on your loan or lease, and what your
vehicle is actually worth if your vehicle is stolen or destroyed.
is gap insurance important? Because it's very common, in these days of
long term loans and leases, rolled-over and refinanced loans, and little
or no down payment, to be "upside down" - to owe more on your loan or
lease than your car is actually worth. This can mean you'll still owe
hundreds or thousands of dollars to the finance company even after your
insurance has paid off for a car that has been totaled or stolen. This
turns out to be a shocking surprise for most people caught in this
So, nearly all leases have gap protection,
but most loans do not. You're better protected with a lease, unless you
purchase the gap insurance separately at extra cost for the loan - if
you can find somewhere to buy it.
Lease or Buy? Which is Better?
is it better to lease, or to buy? As with any question of this type,
there are always pros and cons, pluses and minuses, advantages and
Let's simplify the answers and summarize them
1. The short-term monthly
cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying.
the same car, same price, same term, and same down payment, monthly
lease payments will always be 30%-60% lower than loan payments. This is
still true even when compared to 0% or low-interest loans (see
comparison at right). For actual detailed comparisons, see our Lease vs.
medium-term cost of leasing is ABOUT THE SAME as the cost of buying,
assuming the buyer sells/trades his vehicle at loan-end and the leaser
returns her vehicle at lease-end.
The overall cost of leasing
compared to buying, over the same lease/loan term, is approximately the
same, 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, lower total finance costs, and the assumption that a
purchased vehicle will return full market value if it is sold or traded
at the end of the loan (often a bad assumption, especially if traded).
However, when the benefits of wisely investing monthly lease savings are
considered, and sales tax savings (in most states), the net cost of
leasing can easily be less than buying.
3. The long-term cost of leasing is ALWAYS MORE than the cost
of buying, assuming the buyer keeps his vehicle after loan-end.
a buyer keeps his car after the loan has been paid off and drives it
for many more years, the cost is spread over a longer term. It doesn't
take rocket science 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. Therefore, leasing is always more
expensive than long-term buying. If long-term financial cost savings
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. However, many automotive consumers have other
objectives that reduce the importance of long-term cost savings.
which is better, lease or buy?
It depends on what's most
important to you. All of us have different lifestyles and priorities -
in cars and in finances. Car lease-versus-buy decisions must be made
with your own lifestyle and priority attributes in mind. What's right
for one person can be totally wrong for another.
LEASE - If you enjoy driving a new car
every two or three years, want lower monthly payments, like having a
car that has the latest safety features and is always under warranty,
don't like trading and selling used cars, don't care about building
ownership equity, have a stable predictable lifestyle, drive an average
number of miles, properly maintain your cars, are willing to pay more
over the long haul to get these benefits, and understand how leasing
works, then you should lease.
- If you don't mind higher monthly payments, prefer to build up
trade-in or resale value (equity), like the idea of having ownership,
like paying off your loan to be payment-free for a while, don't mind the
unexpected cost of repairs after warranty has expired, drive more than
average miles, prefer to drive your cars for years to spread out the
cost, like to customize your cars, expect lifestyle changes in the near
future, and don't like the risk of possible lease-end charges - then you
If you have already decided to lease.
single best way to drive a late model car at the lowest possible cost is
to take over someone's existing car lease. It's less expensive than
buying and less expensive than taking out a new lease.
existing car leases were taken out months ago when car manufacturers
were offering incredible money-losing lease deals and very low monthly
payments. Many people who took those great lease deals now need to get
out after losing jobs or suffering other financial distress. Most lease
companies allow those leases to be transfered to someone else by simply
paying a transfer fee.
Since the original lessee got a good deal -
a deal that is not possible today - anyone taking over the lease will
inherit the same great deal, same low monthly payment, with NO MONEY
DOWN, no upfront sales tax, and in many cases, a CASH incentive from the
"seller." There is no other way to get a late model car this cheap with
payments this low.
Online companies such as
Swapalease.com act as match-makers between people who want out of a
lease, and people who want to take over a lease. Swapalease.com is the
largest online lease marketplace and have the largest inventory of lease
takeover vehicles. Look over the vehicle listings and if you find a car
you like, they help arrange the lease transfer with the lease company.
It's easy and fast.
Read more at www.leaseguide.com