So you need a car. This is a good time of year to look into it. The question is: what’s the best route to acquiring a reliable set of wheels? In addition to choosing the make and model of vehicle you wish to drive, one of your most important decisions is whether to lease or buy. As with any significant financial transaction, there are pros and cons to consider before signing on the dotted line.
Leasing a car
When you lease a car, you agree to make monthly payments for a new car over a defined period of time. Lease payments cover the vehicle’s estimated depreciation (how much value the car loses during the time you own it) and finance charges, but they do not build equity or ownership in the vehicle. With an open-end or equity lease, you agree to purchase the vehicle at a predetermined price at the end of the lease. With a closed-end lease, you can walk away from the car, that is, once any outstanding fees are paid. Weigh these advantages and disadvantages before leasing a car.
Advantages of leasing
Leasing allows you to get into a new car every few years with lower monthly payments and occasionally, with no down payment. When the lease ends, you don’t have to worry about finding a new owner for the car. If your leased car is primarily for business use, you may be able to get a small tax break.
Disadvantages of leasing
Despite offering more affordable monthly payments, leasing rather than buying a car will cost more over time. With a lease, you pay the car’s depreciation when it is at its highest (in the first few years of ownership) and never gain a financial return. You may be stuck with excess mileage or wear-and-tear charges. If you want out early you may be charged a penalty. In addition, a leased car can be more expensive to insure.
Buying a car
When you buy a car, your monthly payments pay down the principal and interest in your purchase. The problem is, cars lose value with time, so the equity you realize at the end of the loan will pale in comparison to the amount you paid toward the loan’s principal. Of course, some cars hold their value better than others, and regular maintenance and careful driving can help retain your car’s resale value. Consider these advantages and disadvantages of buying a car with a loan.
Advantages of buying a car
In the long run, buying a car is generally a better bargain than leasing, assuming you keep the vehicle for several years after the loan is paid off. The reason is, at the end of the loan, you will own the car and be free of car payments. If you finance a used car rather than a new car, your potential savings are even greater. Buying a car gives you the flexibility to keep the car or sell it at the end of the loan. You also have the freedom to drive your car as many miles per year as you like (although high mileage does affect resale value).
Disadvantages of buying a car
By the time you own your car, you’ll be driving an older vehicle that might require costly repairs. If your car is stolen or totaled early in your loan, you could end up owing more than the insurance value of the car (a lease, on the other hand, usually includes “gap insurance” which helps cover replacement costs in those events).
Satisfaction should come from making an informed decision
Your decision to lease or buy will ultimately boil down to your financial circumstances and preferences. Find a reputable car dealer and ask questions before closing the deal. Check out lease and purchase calculators on the Internet and plug in actual lease or loan terms to evaluate specific offers. Ask your personal financial advisor or tax advisor to help you assess the impact of buying versus leasing a car. After you look at the numbers, you’ll have a better understanding of how each choice affects your finances.
This information is provided for informational purposes only and is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor.
