Leasing and purchasing are two methods of automobile financing. Leasing finances the use of the vehicle, while purchasing is financing the purchase of the vehicle. Each has its own set of pros and cons.
Is having a new vehicle every two or three years with no major repairs something that is important to you? Are having lower monthly payments and no down payment important you? Then a lease may be right for you.
Is it more important to pay off your vehicle and be debt-free at some point? Do you mind paying higher payments for the first five years? Then buying may be the better option for you.
When you lease you pay for only a portion of the vehicle's cost. This is the amount that you use during your driving time. You have an option of not making a down payment and paying sales tax only on your monthly payments. You will also pay a financial rate or money factor, which is similar to the interest on a loan. You make your first payment at the time you sign the contract. At the end of the lease term you have an option of turning the car in or purchasing it for its depreciated value. In this case, you may save money if you decide to purchase at the end of your lease versus what you would have paid to finance the car new.
When you buy you pay for the entire cost of the vehicle regardless of how many miles you drive. You will either get dealer financing or direct lending from your own bank or credit union (terms are usually more favorable than dealer financing). You will generally make a down payment, pay sales tax and pay an interest rate based upon the financing method. You then pay your first car note a month after you sign the contract.
Leasing makes sense if you can make the savings work for you. Many financial advisors suggest you take the lease savings and put it into a mutual fund or some other investment during the first 24 to 36 months of making lease payments. This gives you the option of potentially paying off the car at the end of the lease or close to it. See the chart below to assess potential monthly savings of leasing.
Lease vs. Buying Comparison Chart
| |
Lease
|
0% Loan
|
6% Loan
|
|
Car Price
|
$23,000
|
$23,000
|
$23,000
|
|
Down Payment
|
$1,000
|
$1,000
|
$1,000
|
|
Interest Rate
|
6%
|
0%
|
6%
|
|
Residual
|
$11,000
|
n/a
|
n/a
|
|
Months
|
36
|
36
|
36
|
|
Payment
|
$388.06
|
$611.11
|
$669.28
|
Is leasing or buying right for you? There are pros and cons. Here are the key considerations:
- The short-term monthly cost of leasing is almost always significantly less than buying. Leasing can be as much as 30 to 60 percent lower each month than buying. This is true even when you are buying and using a zero percent interest loan.
- The medium-term cost of leasing is roughly the same as the cost buying. The means the buyer sells or trades in the vehicle when the loan is paid off and the leaser returns his vehicle at the end of the lease.
- The long-term cost of a lease is always more than the cost of buying. This means that the buyer keeps the vehicle once the loan is paid off. For example, the buyer may finance the car for five years, but keeps the car for ten years. This means the buyer does not have a car note for five years.