Your Next Car--Buy or Lease? (Part 2)
More to consider about the common lease verses buy dilemma.
Today we continue the topic about leasing versus buying a vehicle.
Even though the decision to buy or lease has definite financial implications, it’s not the only factor to take into consideration. Your personal taste and lifestyle also plays a big part in the decision. What’s right for one person can be totally wrong for another.
Someone who’s a fan of leasing might argue the following advantages:
- I want lower and more affordable monthly payments.
- I want a brand new vehicle every few years. And I don’t want the hassle of having to worry about trade-in values or haggling with buyers.
- I want to drive the latest models with the best safety and comfort features.
- I want to drive a car that’s in great condition without worrying that a major repair will be needed in the future.
- Most potential repairs will be covered if I get a lease term that lasts just as long as the manufacturer’s warranty.
- I drive a predictable number of miles each month and can return the car at the end of the lease period with minimal wear-and-tear.
- I have a stable career and income to make the monthly lease payments. I would never need to terminate a lease early.
- I’m willing to pay more in the long run to have all the benefits of leasing.
On the other hand, a fan of buying could argue these points:
- I don’t mind making higher monthly payments because I’m saving money in the long run.
- I like knowing that each payment allows me to build up equity for the future when I decide to sell the car or trade it in.
- I want to pay off my car and drive it debt-free while I save or invest the equivalent of my old loan payment. Plus the longer I can drive it, the less it really costs me.
- I need to drive as many miles as I want and to use my car or truck without worrying about keeping it in perfect condition.
- I like to customize my car with accessories and flashy paint jobs.
- I’m willing to take the risk that major repairs could be needed after the warranty expires.
- I’m convinced that buying two- to three-year-old used vehicles is the most economical option. This is because I get to take advantage of a large depreciation discount.
- I have an unstable career or may need to relocate out of the country. To end a lease early would mean getting stuck with the total payoff in addition to early termination charges.
Know Your Objective
So what do you think? Are you a leaser or a buyer? Is long-term cost savings on a new or used vehicle your primary objective? Then it will usually be best to buy and drive a vehicle until, as they say, “the wheels fall off”! Or drive it at least until the repair costs begin to exceed the cost of replacing it. This is the best way to save money in the long run unless you have a really great investment plan for the money you could save by leasing.
If you like the benefits of leasing, make sure you understand what those conveniences will ultimately cost you. Here's a link to a great Lease vs. Buy Calculator. You can use this tool to compare any lease deal with a similar purchase loan. After answering a few questions about the offers you're considering, the calculator will compare monthly payments and total costs of the deals! Isn't the Internet wonderful?
You'll want to get familiar with lease terminology and jargon in order to make the best deal possible. An important word to look for at the top of your lease is “closed-end.” This type of lease is also called a “walk-away” lease because you simply return the vehicle at the end of the lease term. Closed-end leases are the most common type of consumer lease because you have no obligations other than potential charges for excess mileage or damage to the vehicle.
Insurance Considerations for Leases
Also make sure that your lease includes gap coverage. This is common insurance for leases but is rare for purchase loans. Gap coverage protects you if your vehicle is stolen or totaled, for example, and you owe more than it’s worth. Gap coverage pays the difference when you’re caught in this unfortunate situation of being “upside down” on the vehicle's value.
And speaking of insurance, even with a lease you’re still responsible for keeping the vehicle fully insured. Some people mistakenly believe that the leasing company automatically provides insurance. You also have to pay for regular maintenance just as if you owned the vehicle.
What to Do at Lease-End?
Another consideration when leasing is what to do once the lease term expires. You may have the option to buy the vehicle at a price set in the lease. This might be a good idea if the vehicle is worth more than the agreed upon purchase price and obviously a bad idea if it’s really worth less.
The Best Lease Deals
Remember that the primary factor that determines the cost of an auto lease is the depreciation that’s expected to happen during the term of the lease. Different makes and models of vehicles depreciate at very different rates. So the best lease deals can potentially be found for those models that have the lowest depreciation rates.
I’ll devote a future show to the specifics of auto leasing, with tips for finding and negotiating the best deals.
If you do lease a car but later decide you want to get out of the lease early, I have an episode about trading car leases that can help you avoid taking a financial hit.
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Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
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