Financial guru Suze Orman says leasing a car is like stroking your ego. Many of us can identify with wanting a nice car. Who wouldn?t want to drive around in a new Audi A6 instead of an extinct Yugo? While the comparison may be a bit extreme, everyday people sign leasing contracts for cars that they may not be able to afford to actually purchase because it allows them to get behind the wheel of a nice, new car. On the other hand, leasing makes more sense than purchasing for some people ? it all depends on your lifestyle and priorities.
?Should you lease or purchase your car?? is one of the first questions to ask yourself when beginning the car buying process. Leasing and purchasing are different ways of financing your car. Follow this example.
Let?s assume you?ve got your eye on a $20,000 car. When purchasing, you?ll pay the entire $20,000 plus finance charges (and possible fees.) You?ll obtain a loan which will be made up of a principal charge and finance charges. The principal charge pays for the car and the finance charges pay for the interest for the loan.
If you?re leasing a car worth $20,000, you?ll pay for the cost of the depreciation of the car over the term of the lease. This means that if the car depreciates by $9,000 over three years, you?ll pay the $9,000 and payments will be divided up over 36 months plus finance charges (and possible fees.) The cost per month for a lease payment is always lower than the monthly cost of purchasing a car.
The main advantages of leasing a car are the low down payment, low monthly payment and no hassle when the lease is up. You don?t need to worry about repairs, and you just turn in the car after its term then get a new car. However, there are disadvantages, such as a penalty for driving too many miles, no equity in the car and a lack of flexibility. If you want to get out of your lease anytime during the few year term, it?s likely going to cost you quite a bit. There?s simply not as much freedom as when you purchase a car.
Purchasing a car also has its advantages and disadvantages. It will help to make a down payment, but most likely you?ll have a higher monthly payment than with a lease. Though you?ll own the car and will be free to drive as many miles as you want to for as long as you have the car. You will be responsible for repairs as the car ages, but on the other hand you won?t have a car payment every month after the car is completely paid off.
There are important questions to ask yourself when considering leasing or purchasing.
- Is having a new car every few years important to you?
- Are lower monthly payments important to you?
- Is a low repair risk important to you?
- Is having no down payment or a low down payment important to you?
- Do you drive a minimal amount of miles per year?
If you answered yes to these five questions, leasing may be your best option.
- Is long term cost savings important to you?
- Is having some ownership in your car important?
- Are you looking to make a higher monthly payment initially and pay off your car to eventually be payment free?
- Are you hoping to keep your car for the next several years?
- Do you drive a considerable number of miles per year?
If you answered yes to the second five, purchasing may be your best option.
One not so common option is a lease to buy contract. This means that after the original lease term is fulfilled, you have the opportunity to purchase the car. This option typically costs buyers more in the end, as the price of the car is usually inflated. Cars with a history of a high resale value make the best lease deals. Steer clear of models that have had a large number of recalls or safety problems, whether you?re leasing or purchasing. Also avoid models that have frequent style changes from year to year, as these don?t hold their value too well either.
All leases should have GAP coverage, which is the difference in cost between what you owe on your lease and what the car is actually worth if stolen or destroyed. Having this coverage is important especially in situations where owners owe more on their car than it?s worth at the time of an accident. If your car is destroyed, how awful would it be to owe hundreds or even thousands on a car that?s long gone?
Keep in mind that all cars depreciate, so whether you?re leasing or purchasing, there will always be some money lost over the years that you?re driving the car. If you?ve purchased, what remains of your car?s original value is equity, or resale value of the car. After the depreciation has taken its toll, this is what you get back when or if you sell the car.
So should you lease or buy? There?s no definitive answer. The answer depends on your individual situation. If you?re cutting it close financially, you should strategize and purchase a newer used car. Buying a used car will put you in the driver?s seat of a like-new car, with a better purchase price, while avoiding the disadvantages of leasing.
There are other factors to be considered in your decision to lease or purchase. If you?re a business person who entertains clients or you want to claim your car as a business expense, then you may prefer to lease. Or, if you simply prefer new car every couple years, then leasing is for you. If you?re just starting a family and aren?t sure what your needs will be in a couple of years, purchasing may be a safer idea. Remember the penalties associated with terminating a lease early?
To sum it up, if your goal is long-term cost savings, then purchase your car and drive it until it won?t go another mile. If you like the idea of ownership, working to pay off your loan and driving your car for years without worrying about mileage, then buying is definitely for you. If short-term cost savings is more appealing, having a newer car every few years and ownership equity or mileage are not your concerns, then lease your car. You won?t go wrong if you make the decision that?s best for your lifestyle.
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