Understanding Leasing vs Buying a Vehicle
To Lease or Buy?
Understanding your needs to meet your financial goals
Ever wonder what the difference is between leasing and buying a car? While these ways of acquiring a car are very different, finding the right choice really depends on your needs. In this article we’ll take a look a the different factors that come into when analyzing the needs for a car.
1. The benefits of Leasing
The main benefit to leasing a vehicle is that you’re paying less than you would if you were to buy a new car. Leasing focuses on financing the depreciation of a car, rather than the entire purchase price. The manufacturer sets the residual value (value at the end of the lease agreement) and the money factor (interest rate) so all you really have to do is negotiate the capitalized cost, which is just a fancy leasing-way of saying the selling price. Sales tax is also on a pay-per-payment, so you’re not financing the sales tax of the entire selling price of the vehicle.
Another benefit is always having a new vehicle, and having a new vehicle means newer tech, as well as the latest safety features. So how often do you find yourself looking at a new car or changing cars? If you’re like me, and see yourself switching cars every 2-3 years, leasing may be the option for you. While buying a car may seem like the easier option, the fact that you’re keeping your cars pretty much the entire time of the depreciation makes buying a new car a very poor financial option.
2. The downsides of Leasing
What are some of the downsides of leasing a vehicle? For one, leasing programs often, if not all, have a limit to the number of miles it can be driven in a year. Most vehicle lease deals have a 10,000 to 12,000 mile-per-year limit, but the higher the mile allowance goes, the higher the price of the payment. Not only does a lease prevent you from driving too many miles, it can also limit the use of the vehicle. Most lease programs do not allow for ride-share programs, such as Lyft or Uber - but with the limited miles you’re allowed anyways, the leasing company won’t have to worry about that.
Another downside is the fact that you never own car. You’re leasing it from the manufacturer and that means that you have to give the car back once the lease agreement has been satisfied. What does that mean? This means that you cannot modify the vehicle in any way. For most consumers this won’t be a problem but it’s always something to take into consideration.
Another downside to mention is that you do not build any “equity”. When the lease agreement is completed, the vehicle is turned in, and you’re left with nothing. If you went over the allotted mileage for the lease term, you may even owe money.
One last thing to mention, leasing is not available for all buyers. Manufacturers will only lease to consumers with good to excellent credit.
3. The benefits of Buying
The initial benefit is that once the car is paid off, it’s your’s to keep - instead of virtually having unlimited payments for as long as a vehicle is being leased. Once it is paid off, you can do whatever you want with the vehicle, use it however you want - there are no limits to the number of miles that can be driven (even when the car is being financed).
Another benefit is that you can sell the vehicle whenever you want - you’re not bound to any contract on whether you keep it or not, even if you owe more than the vehicle is worth, the option is still present at any given time. Of course, you’d want to use your discretion when it comes to when and how much you want to sell the car for - just because you can trade it in or sell it, doesn’t always mean you should.
Financing is pretty clear cut and much easier to understand. The consumer also has the option to pick the financing bank - which may have some benefits such as having a bank that gives better rates and discounts for you having an account with them or have established a relationship.
4. The downsides of Buying
One of the greatest downsides to purchasing a vehicle is potential costs associated with not keeping the vehicle for more than the financed term. Short-term ownership is detrimental to the buyer’s finance for many reasons:
The financing terms for an amortized loan demands that the interest is paid up front. Most financing terms will have the interest amount equal to the principle amount only about halfway through the loan. Every payment before that has more payment towards the interest than the principle.
The full sales tax amount is applied to the financing of the vehicle. When compared to leasing, where the sales tax is paid each payment, the cost incurred is higher, so even if you keep the vehicle for only 3 years, your total amount owed includes future tax payments.
You’re most likely upside down on the loan. While some vehicles may have an amazing second-hand market, the truth is that most vehicles depreciate rapidly to the point where a short-term ownership will lead into you owing more than what the vehicle is worth - unless you had put a giant down payment on it.
Maintenance can also be an attributing factor to the downsides of buying a vehicle. While most leasing options include maintenance plans for the lease term, most new car purchases do not offer a maintenance plan longer than a year or so. Once that initial maintenance plan is done for, it will be your responsibility to maintain the car for the rest of the time you plan on keeping the vehicle.
Conclusion
I hope this has helped you in making a decision on your next purchase - basically if you’re the type to keep a car for a long time, you should buy, but if you do not keep your cars more than 4-5 years, you should look into leasing. In the future I will explain the calculations of a lease term and a purchase term.
