New Car – Lease or Buy – Explained

lease vs buyWhen getting a new car, is it better to buy or lease? Lease vs buy? What are the pros and cons of each?

It’s a question we hear all the time.

However, the answer is not that simple. One way is better for some people, the other way is better for others.

Both leasing and buying with a loan are forms of auto financing. Leasing is not renting, as some people mistakenly think.

With leasing you finance the entire value of the car, just like with a loan, but you only pay off the amount that the car’s value will depreciate during the lease term. All cars decrease in value over time, whether they are leased or purchased. At the end of the lease, you pay off the remaining balance by returning the car to the lease company, or by purchasing it.

An average car will depreciate in value by about 50% over a period of three years. That’s why lease payments are about 50% lower than loan payments for the same car, same term.

Therefore leasing is good for anyone who likes driving new cars every 2-4 years and doesn’t want the hassle of trading or selling their old cars. Leasing is also good for those who drive only average number of miles each year (about 10,000 – 15,000 miles) and take good care of their cars. Another benefit of leasing is that sales tax is only charged on each monthly payment (in most states) instead of the entire value of the vehicle.

Now, let’s compare to buying with a loan.

When you finance a car purchase with a loan, you agree to pay off the entire value of the vehicle over the term of the loan. You also pay sales tax on the entire value. If you decide to sell or trade your car after 3 years, for example, you can only get about 50% of its original value (due to depreciation). In other words, leasing and buying are about the same if you trade or sell your car, assuming the same term ans assuming the car has an average number of miles and is in good condition. However, those who drive their cars for many years will save significant money and avoid monthly payments for much of that time.

Therefore, buying is better for anyone who likes to pay off their loans and keep their vehicles for years or who drives more than about 15,000 miles per year, or likes to customize their vehicles. Furthermore, buying is better if you are not particularly good at maintaining your vehicles or repairing dents and scrapes, for which you would be charged if you leased.

There is also the argument that with leasing you don’t own your vehicle, which is true, unless you decide to buy it at lease-end. However, remember that when you buy with a loan, say a 3 year loan, what you own is only 50% of the vehicle’s original value. The money that you have “lost” is exactly the same as what you would have lost if you had leased. Your higher loan payments served to build up that remaining 50% ownership equity. With leasing you have lower monthly payments, but you don’t build up ownership equity.

Now for some remaining details.

Leasing is somewhat more complicated than buying with a loan, which often makes it difficult to know whether you are getting a good deal or not. We recommend anyone considering leasing should visit LeaseGuide.com before making a decision. Also, with leasing there are some fees that don’t come with buying, such as an acquisition fee (bank fee) of about $595 and a lease-end disposition fee (about $300), and fees for exceeding the lease mileage allowance or for repairing dents and damages to the vehicle.

Insurance is required when leasing — but also required by most auto loan companies — and may be higher than your state legal minimums. Terminating a lease before its end date can be troublesome and expensive, but not much more than terminating an “upside-down” loan.

Leasing requires good credit, just like a loan, since both are forms of auto financing. Actually, leasing typically requires better credit than a loan. Therefore you should take a look at your most recent credit report and credit score before you go car shopping.

Don’t let a car dealer surprise you with bad news that you don’t already know about yourself. If you don’t know your current credit score and rating, you can get it quickly and easily online. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
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