Between Leasing and Buying
You have decided you want
a new car. Should you obtain a loan, lease, or pay cash?
There are pros and cons for all three methods. You should
be able to make an informed choice about what's best for
you based on the initial cash outlay, money and operating
costs, equity and ownership, and tax and insurance
PAYING IN CASH
Only about 10% of all automobile purchases are in cash.
If you pay for the entire cost of your car with cash up
front, it's all yours and you don't owe anyone anything.
However, you also don't have that money available for
investing, for other uses or in case of an emergency.
Leasing almost always has one very powerful advantage
over a loan: lower initial cash outlay. With leasing
there is normally little initial cash required in order
to put yourself "in the car." Generally, the
better your credit rating, the less cash required at the
start of the lease.
Usually you will
be asked to provide a refundable security deposit (similar
to the kind asked for when renting an apartment), the
first and perhaps last monthly payment, and sometimes, at
your discretion, a "capitalized cost reduction,"
or down payment. As with most terms in a lease, these can
be structured to meet your needs.
When deciding whether to lease or to buy, continuing
costs are another factor that should be considered.
Continuing costs are all those costs, which are incurred
after the initial costs and before the end-of-the-loan or
lease costs. Although the monthly or "periodic
payment" is usually the biggest portion of
continuing expense, it is not the only item you should
insurance, repairs, maintenance and operating costs all
these items are part of continuing expense whether you
buy or lease.
Basically you are renting a car when you lease it. At the
end of the lease, you will have no equity or ownership of
the vehicle. When you are gradually building equity as
you pay it off. However, you should consider the amount
of money that you will have to expand over the total
period of the loan in order to acquire title to the asset.
Even though you will "own" the car after making
all the loan payments, in all likelihood the value of the
car will be worth much less than the amount that was
spent in order to obtain it. And even though an asset, it
is a continually depreciating one, losing more and more
of its value with each passing day.
When you buy a car in most states you have to pay the
sales tax up front in a lump sum. With leasing, you can
generally amortize or spread out the sales and rental or
use tax over the term of the lease.
If you lease,
you may have to change your insurance coverage and your
lease contract requires you to do so. Leasing will
requires higher limits for insurance coverage, for both
public liability and property damage (collision and
comprehensive). Leasing may also require a lower
deductible on your policy.
Since tax and
insurance obligations do vary by state, know which
requirements apply to your situation.
Because of the way leases are structured, the payments
can be lower than loan payments. That way you can
generally add more options or upgrade to a more expensive
model than you can afford with a loan.
how often you want to drive a new car. Leases can have
shorter terms than loans, so you can drive a new car
every two or three years if that is important to you.
Advantages and Disadvantages
|- Lower monthly
- Little or no down payment*
- More expensive car for less money
- More cash available for other purchases
- Sales taxes paid over term of lease
|- Equity and
- Lower insurance requirements
|- No equity/ownership
in the vehicle
- Higher insurance requirements
- Early termination liability
- Fewer dollars available for other-Potential
incremental end-of-lease uses costs like excess wear and tear and additional mileage
|- Higher initial
- Monthly payments often higher