buying Buying vs. Leasing

21:35  05 march  2018
21:35  05 march  2018 Source:   U.S. News & World Report

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Buying a new car isn’t the only way to get a new ride. Leasing offers an alternative that usually includes lower monthly payments. Though it was once reserved for corporate or luxury car customers, leasing is now available to any car buyer who has excellent credit. It now accounts for around 30 percent of all new car sales, due to the high average price of new cars and the changing buying habits of American customers.



Whether you choose to buy a new vehicle with cash, finance your purchase, or lease, you’ll find that any car dealership is equipped to handle the transaction. While leasing can get you lower payments and get you into a nicer car, it does have some drawbacks. Depending on how much you drive, your financial situation, and your goals, buying a car might be the better idea in the long run.

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In the following sections, we’ll take a deep dive into the pros and cons of buying a car compared to leasing a car.

Automakers frequently offer money-saving deals on both buying and leasing, and you can explore them on our lease deals page and purchase incentives page. You can save even more when you buy or lease using the U.S. News Best Price Program to connect with local dealers.

Benefits of Leasing a Car

Leasing enables consumers to trade up for a new car almost as often as they buy a new cell phone. That means they can get the latest in advanced safety and technology features for their vehicle. They'll also generally pay less each month than they would to purchase the same car. Depending on their location, significant tax savings may be another benefit to leasing.

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To understand why, let’s take a look at how leasing works.

How Leasing Works: When you buy a car, you are responsible for the entire purchase price. You either have to pay it in cash, apply the value of your trade-in, or finance the whole cost and pay interest on the loan. Lease customers only have to pay for the difference in the price that they negotiate and the car’s expected value at the end of the lease (also known as its “residual value”). Essentially, you just have to pay for the depreciation that occurs over the term of the lease agreement.

Here’s an example. Say you want a 2018 Honda CR-V, and you have negotiated a $25,000 price. If you buy, you have to finance the entire $25,000, less any down payment or trade-in. If you lease, and the residual value is (for example) 60 percent after a three-year term, you only have to pay for 40 percent of the car’s price plus interest and fees. That $10,000 plus interest and fees is divided between what you pay at signing and a series of equal monthly payments. In leasing, interest is also called the “money factor.”

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Lower Monthly Payment: As you can see, unless you make a huge down payment or have a high-value trade in, leasing will almost always get you a lower monthly payment than you would get if you were to purchase the same car. You may even be able to add a few more options or upgrade to a more expensive model while staying within your car-buying budget.

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No Need to Worry About Selling Your Trade-in: When the lease term ends, you simply drop the car off at the dealership.

Car Remains Covered Under Warranty: Most lease terms last three years, but there are both shorter and longer contracts available. Because three years is the same length (or shorter than) the basic warranty on most cars, you will have a predictable total cost of ownership. Some leases even include basic maintenance, so your only costs will be insurance and fuel.

Small Down Payment: For consumers who don’t have a lot of money saved up for a down payment or who have a car that won’t give them much back as a trade-in, leasing often makes sense. Many leases – especially advertised lease deals – have nothing due at signing, and it’s easy to find one that only requires a couple thousand dollars down. Remember, however, that just like with a purchase, the more money you pay at signing, the lower your monthly payments will be.

Always Have the Latest Technology: Today’s cars are rapidly evolving with higher fuel efficiency, advanced connectivity features, and high-tech safety gear that can help you to avoid accidents. With leasing, you can always be in a car that is nearly state-of-the-art without having to sell your car every few years. You simply swap your leased car for an updated model at the end of the lease.

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Tax Savings: Leasing a new car can also potentially save you a ton of money in sales tax, although you will want to check with a tax professional to find out how leased vehicles are taxed in your area. In some areas, you'll only have to pay sales tax on the amount you spend at signing and on your monthly payments. In other areas, you'll have to pay tax on the whole price of the car.

The Downside of a Car Lease

When you lease a car, you don’t actually own it; the leasing company does. They can put restrictions on what you do with it, how you take care of it, and how many miles you can drive.

Mileage Restrictions: Nearly every lease has mileage restrictions built into the contract, generally allowing between 9,000 and 15,000 miles per year before you have to pay steep excess mileage charges. They don't really check each year, but the annual limit is computed to a total for the entire lease. For example, if your lease allows 12,000 miles per year, which is common, you can drive 36,000 miles over the course of a three-year contract.

Excess mileage charges can snowball into an unexpectedly large fee at the end of the lease. If you're charged 20 cents per mile over the lease cap, that 20 mile trip to the airport just cost you $4.00. It is critical that you have a reasonable estimate of how many miles you drive each month before you even think about signing a lease.

Excess Wear Fees: While some wear and tear is to be expected, you’ll be required to return the car in nearly its original condition, with no excess wear, damage, or customization that can’t be easily removed. If you don’t, you can be charged excess wear charges, even if you are under the allowed lease mileage. You’ll also have to be able to show that all recommended service was performed at the proper intervals.

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What is and is not allowed will be spelled out in the lease contract. You can’t assume that because you were allowed to do something with your last lease, you’ll be able to do it with your new lease.

Ride Sharing Restrictions: If you are planning to use a leased vehicle for a ride-hailing company such as Uber or Lyft, you should make sure it is allowed by your leasing company, and make sure you are allowed enough miles to cover your ride-hailing business.

No Equity: Because of how leases are structured, you have no equity in the car, and when you return it at the end of the contract, you will have nothing to use as a down payment on your next vehicle. In fact, you might be hundreds or thousands of dollars in the hole if you have excess mileage or have damaged it. If you decide to buy the car, you'll have to finance the balance, and the rate will likely be higher than it would be for a new vehicle since your lease return will be considered a used car.

You Need Excellent Credit: With few exceptions, you’ll need to have a top-notch credit score to be able to lease a car. That’s even more critical if you are trying to get a manufacturer-subsidized special lease deal. There are some programs for lease customers with bruised credit, but it’s usually easier to get a loan than to get a lease if your credit isn’t excellent.

GAP Insurance: Leasing companies will almost universally require lessees to purchase GAP insurance, which ensures that the lessor will be made whole if the car is totaled or stolen.

Benefits of Buying a Car

When you buy a car for cash, you own it outright as soon as you sign the paperwork. If you take out an auto loan, the bank owns it until the financing is paid off, and then you own the car. Make your car payments, and your equity builds each month, as long as the loan payments outpace the rate that the car depreciates. Lease customers never own the car and never have any equity in it.

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No Monthly Payments After Loan: When you pay off the car, you won’t have any more monthly car payments. You’ll just be paying for fuel, maintenance costs, and insurance. If you are the type of car buyer who wants to drive the vehicle until the wheels fall off, leasing is not for you.

No Mileage Restrictions: When you buy a car, there's nobody to tell you how many miles you can drive each year, though some lenders may put restrictions on use as an Uber or Lyft. Rural residents who have to travel long distances are almost always better off buying than leasing.

No Customization or Excess Wear Fees: Car buyers can customize their rides as much as they like, and those additions can add value when it comes to selling the car. Any changes to a leased car will likely cost you at the end of the contract. Buyers who miss a regular service interval or two don't have to worry about a fee when they sell the car as a lease customer might.

Your Credit Doesn’t Have to Be Excellent: While the interest rates might be higher, even car-buying customers without perfect credit scores will likely be able to get a car loan.

Drawbacks of Buying a Car

More Expensive: Buying a car is more expensive than leasing, at least in the short run. Not only is the overall cost higher, but if you have a car loan like most consumers, the interest that you pay will be based on the entire balance. The sales tax you pay will also be much higher in most areas. Unless you take out a car loan with a large down payment or a long term, your monthly payments will likely be higher than lease payments.

Beware Long-Term Loans: Many dealers will try to entice you into an extended loan to get the payments down, but that's not a good idea. Long-term auto financing usually carries a higher interest rate and is riskier for buyers who will owe more than their vehicles are worth for most of the loan term. Because the rate is higher, and interest has more time to accrue, your total vehicle cost can climb significantly.

May Need a Down Payment: Often banks and credit unions will require that you pay a 10 to 20 percent down payment. That’s not always the case, but if it is, you’ll have to pay more up-front than you do with a zero-down lease. If you suddenly and unexpectedly need a car, such as after an accident, having the money for the down payment can be challenging.

Unpredictable Depreciation: Car buyers face uncertain market values when it’s time to sell or trade-in their cars. If you owe more than the vehicle is worth, it’s called being “upside-down” on the loan, and you are still liable for paying the entire loan balance off.

With a lease, it’s the leasing company’s problem if the vehicle is worth less than the residual value. If you own the car, any unexpected dip in its resale value is your problem and may leave you short when it comes time to buy your next vehicle.

Figuring the Cost of Your Car

Whether you buy or lease, the real out-of-pocket cost of the car is not the price that you pay to the dealer, unless you buy the car with cash. You need to figure in the cost of financing and fees across the life of the lease contract or auto loan.

To price a lease, you take the amount due at signing and add the monthly payment amount by one less than the number of months in the contract. You subtract one because the first payment is usually included in the amount due at signing. For example, if you find a three-year lease with $2,000 due at signing and $300 payments for three years, the total cost of the lease is $2,000 plus $300 times 35, or $12,500.

Pricing an automobile purchase is a bit more complicated, but with the use of an auto loan calculator, it’s still pretty easy. Plug the numbers into the calculator and you will get a monthly payment amount. Multiply that number by the number of months in the loan, add the amount of any down payment, and you have the total cost of the financing.

Let’s say you’re buying a $30,000 compact SUV with $3,000 down and a six-year loan at 3.3 percent. The calculator tells us that the monthly payment is $414. To find the total cost, we multiply that $414 by the 72 months of the loan and add the $3,000 down payment. The total cost of the car is $32,808.

The Final Verdict

Every car customer is different, so there’s no one answer to the buying versus leasing question. Consumers need to look at all the costs and benefits of each choice and align them with their needs and budget. It’s critical to think about how many miles you drive each year and which decision fits with your credit history and lifestyle.

Be sure to explore our buying and leasing resources, including our new car rankings and consumer advice content, including how to buy a car and how to avoid common leasing mistakes.

Which choice makes financial sense for you might depend on the incentives that are available on the vehicle you are considering. Be sure to explore our new car financing deals and lease incentives page to see the best offers available.

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