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Buying vs. Leasing

Feb 19, 2014

Leasing is a great option for someone who tends to get a new car every couple years and who drives 18,000 miles per year or less. Leasing offers several advantages over purchasing a car. First, monthly lease payments are lower than monthly car loan payments. The reason for this is that under a lease agreement, you are paying to use a car rather than paying to own a car. So rather than paying for all of the car, you pay for the depreciation of the vehicle over the life of the lease, essentially, the portion of the car that you use.

Under the lease agreement, you know the sale price of the vehicle, and you know the value of the vehicle at the end of the lease, and you know the lease rate factor, which is a similar concept to an interest rate on a conventional loan. Your monthly lease payment is determined based on these numbers. At the end of the lease, you have the opportunity (but not the obligation) to purchase the vehicle at the pre-determined lease end value.

In addition to the lower monthly cost, another advantage of leasing is that the vehicle is under factory warranty the whole time you own it, meaning that yo don’t have to worry about costly repairs.

Some people say that they do not like leasing because they want to own the car, and that is a perfectly valid opinion. However, if you take out a 5-year car loan to purchase a car, and after 3 or 4 years you go to trade the car in, you technically don’t own the car yet because the bank still has the title. In this scenario, you do have a trade in, but it is just barely starting to gain equity. It might make more sense to lease a car for 2 or 3 years, and put the money you save into the bank, and use it as a down payment on your next lease. Not that you need a down payment, which is another bonus to leasing. Many leases only require the first month’s payment due at signing, meaning less money out of pocket than the 10-20% down payment than many lending institutions prefer to get you the best rates on car loans.

Leasing is not for everyone. Some people commute too many miles per year for a lease to make sense. Others prefer to pay off their car and just deal with repairs such as tires, brakes, emissions system, etc. as needed. For many people, though, the combination of lower monthly cost and the peace of mind of always having a warranty makes leasing an excellent choice.