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?
Lease versus Buy?
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.
Leases 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.
The statement in the previous paragraph “One finances the use of a vehicle” is often misunderstood. It implies that one finances only a portion of the vehicle if leasing when in fact you finance the same amount as with a purchase, the difference is that you pay back less.
When making a ‘lease or buy’ decision you must look not only at financial comparisons but also at your own personal priorities — what’s important to you.
Is having a new vehicle every two to four 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?
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.
An important consideration in evaluating the two options is whether one uses their vehicle for business. The tax deduction for business usage requires that one use their vehicle at least 50% of the time for business before any deduction can occur.
First, it’s important to understand that buying and leasing are fundamentally different, not just two versions of the same thing.
Buying and leasing are different
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 (in most instances).
Lease vs Buy Fees
The “fees” are Acquisition Fee, Disposition Fee and Purchase Option Fee. They are separate fees that add to the cost of leasing. The Acquisition Fee however is of great value to the lessee and is important to know what it includes.
- GAP Insurance – Most leases have automatic built-in gap coverage, while car loans do not unless purchased separately. Gap coverage pays the difference or deficit between what you owe on your vehicle and what it is worth if your vehicle is stolen or destroyed in an accident.
- Residual Value Insurance – The resale value of the vehicle is guaranteed in a closed end lease (excluding excess wear & tear and excess mileage). The lessor will buy insurance or self insure in order to guarantee the value. Acquisition Fees have gone up significantly over the years, so has the cost of insuring resale value.
- CarFax – An adverse CarFax report can have a significant impact on a cars resale value. The residual value or resale value guaranteed in a closed end lease protects the lessee from the loss of value in the event of an accident that negatively impacts the value of the vehicle.
Continued in Lease versus Buy Part II