New Car Financing - Buy vs. Lease

The advantage of leasing a car over buying a car is being able to drive "more car" for lower monthly payments and a minimal down payment, possibly no down payment at all.At the end of the lease, you may choose to walk away and not go through a resale or trade-in process.

Leasing is a matter of personal tastes and priorities. The primary advantage of leasing is a new car every three/ four years without worrying about resale. Leasing, however, is typically more expensive - absent special incentives from the dealer.

RISKS

• The primary risk when leasing a car is that the residual value of the car will not meet the agreed expectations at the end of the lease. Depending of the exact language in the lease agreement, you may be held accountable for the difference.
• A lease agreement allows a certain number of miles to be driven per year. The number of miles allowed per year is typically between 12,000 and 15,000. If more miles are driven than allowed, a charge of 15 to 20 cents per mile will be added.
• An open ended lease places you at risk if the vehicle’s value at the end of the leasing period is less than the predicted value. You pay the difference. This is the reason most people choose a closed end lease.
• You are held responsible for any damages above the "normal wear and tear."
• If your driving circumstances change and you no longer desire to lease a car, you will not be able to terminate that lease without having to pay fees.

The lists below summarize the pros and cons of leasing versus buying:

Advantages of Leasing

• Lower monthly payments
• A lower down payment
• You can drive a better car for less money each month
• Lower repair costs (with a 3-year lease, the factory warranty covers most repairs)
• You can drive a new car every 2 or 3 years
• No trade-in hassles at the end of the lease
• You pay sales tax only on the portion of the car you finance

Disadvantages of Leasing

• Since you do not own the car, you do not build equity in the vehicle.
• You don't own the car at the end of the lease
• The mileage you can travel is limited, typically 10,000 to15,000 miles a year
• Lease contracts are confusing, so it makes it difficult to ensure you're getting a fair deal
• Leasing is more expensive in the long run
• Wear-and-tear charges can add up
• It's hard to terminate a lease early if your driving needs change
• There are restrictions on moving a leased car to a different state or abroad. This is especially important to military personnel.

Advantages of Buying

• Pride of ownership - you can do with your car as you please
• Car buying is more economical in the long run
• No mileage penalty
• Increased flexibility - you can sell the car whenever you want

Disadvantages of Buying:

• Higher down payment
• Higher monthly payments
• Responsibility for maintenance costs once the factory or dealer warranty expires (you can expand coverage by buying an extended warranty)
• Trade-in or selling hassles
• Your money is tied up in a car, which depreciates in value, rather than another investment which could appreciate

SUMMARY

Buying a car is the most economical option. At the end of the financing period, you will have equity in the vehicle. Closed-end leasing is an option for a low-mileage driver who can effectively maintain a car and does not mind "leasing" payments for an ongoing period. Personal tastes and priorities will most influence a person’s decision about obtaining a vehicle.