Over the past few years, the popularity of leasing an automobile has continued to grow. In fact, as many as one in three individuals now choose to lease a vehicle rather than purchase one.
Why has leasing become so popular?
The initial cost and monthly lease payments on a leased vehicle tend to be much less than the initial costs and monthly loan payments for the exact same purchased vehicle. However, overall, does that mean that leasing a vehicle is a better idea than purchasing one? The following is a comparison on the most important points of how leasing (under the common close-end type lease) stacks up against purchasing:
• Purchasing – At the end of the loan term, you own the vehicle and can continue to use it.
• Leasing – At the end of the lease term, you don’t own anything and must either purchase a vehicle or lease a new one.
• Purchasing – Down payment, plus taxes, registration and other fees.
• Leasing – First month’s payment, refundable security deposit, capitalized cost reduction (similar to a down payment), taxes, registration and other fees. (As noted, up-front lease costs are usually much less than up-front purchase costs.)
• Purchase – Since you’re paying for the vehicle’s total cost, monthly loan payments are usually much higher than monthly lease payments on the same vehicle.
• Leasing – Since you’re only paying for the vehicle’s depreciation value during the lease term, monthly lease payments are usually much lower than monthly loan payments.
• Purchasing – There is no mileage limit (although excess miles can lower the vehicle’s future value).
• Leasing – Most leases limit you to between 12,000 and 15,000 per year, and if you exceed that amount, there is usually a hefty penalty at the end of the lease term.
• Purchasing – There is no limit on the wear and tear on your vehicle (although excess wear can lower the vehicle’s future value).
• Leasing – Most leases limit the amount of wear and tear, and dealers often charge hefty amounts for exceeding wear and tear limits.
"FONT-SIZE: 10pt; FONT-FAMILY: Verdana">For most individuals, over the long run, the most cost-effective way to obtain a vehicle is to purchase one. And, for many, the best way to do that is to:
"FONT-SIZE: 10pt; FONT-FAMILY: Verdana">• Buy a slightly used – 5,000 to 10,000 miles – or demo vehicle.
"FONT-SIZE: 10pt; FONT-FAMILY: Verdana">• Pay it off over as short a period of time as possible – four to five years tops.
"FONT-SIZE: 10pt; FONT-FAMILY: Verdana">• Keep the vehicle for at least six to eight years. Today, most vehicles should provide quality transportation for well in excess of five years and 100,000 miles.
When Leasing Is Better
If you plan on getting a different vehicle every two or three years (and long-term cost is not a major concern), leasing may be a better choice. And, if you have extremely bad credit, an auto loan may be so difficult to get (or the interest on such a loan may be so high) that leasing a vehicle may be the only way you can finance (or afford to finance) a vehicle.
Rick Shaffer is an attorney, financial writer and host of “The Money Show,” a call-in radio show.