The Pros and Cons of Buying Vs. Leasing a Vehicle
No question seems to polarize financial experts more. But beware:
some of the experts are less expert than they think.
the fantastically successful Suze Orman who cranks out best-sellers about pathways
to wealth and happiness, though rich, advises her readers to definitely buy a
car rather than lease. She says you wouldn't want to lease your life; you'd want
to own it. A head-shaking non sequiter.
expert misapplied real estate reasoning to car buying. That argument: car payments
toward ownership were establishing equity; leasing, like renting a house instead
of buying, was not. The reasoning here is that equity is good, therefore financing
a vehicle is better than leasing.
There is a slight
problem here. "Equity" in a car is close to meaningless unless the name on
the hood is Duesenberg, Delahaye or the like. Cars are more like refrigerators
than houses. You use them and then you replace them.
what's the truth of the matter? Is leasing or buying better?
Here comes a
waffling answer: It all depends. (As I will explain.)
is something definite: "If it appreciates, buy it; if it depreciates, lease
it," so says J. Paul Getty, no financial amateur.
And cars most certainly
depreciate. When you drive a new car off the lot it's worth thousands less
instantly, so don't let an "expert" discourage
you from at least considering a lease.
start at the beginning there are three ways to acquire a car (Well, five, but
theft is illegal and outright gifts are rare.)
(1.) Pay cash. (2.) Finance
the car, paying off a loan in monthly installments. (3.) Lease the car with monthly
cash is like buying panty hose. You pay the money and the merchandise is yours.
With no interest charges the car, in itself, will cost less than either leasing
or financing. But possibly if you invested the cash while paying for the car over
time you might make out even better. Worth thinking about.
a vehicle is the most common approach. Depending on your credit rating, the prevailing
interest rates, the car of your desires and how good a negotiator you are you
might emerge with a terrific deal. Keep up the payments and at the end of the
coupon book the car is all yours for good or ill.
Leasing a vehicle means you can do the same negotiating as you
might as a cash buyer or loan recipient. With the dealer
you can establish a vehicle's price, the value of your trade-in
(if you have one), any down payment, the interest you
will pay in much the same way. Then you make monthly
payments for a fixed period of time. (Usually three
here is where the differences start to show: with a lease your monthly payments
are far less than those on the financed car. Maybe half as much. (Remember you
are not paying for the car, you are paying for the use of it.)
the end of the lease the most important difference appears: the lessee has choices
that no buyer has. You as lessee can decide whether you want to buy the car or
simply walk away. When you signed the leasing contract, something called the residual
value was written right into it. This is a projection of future value established
by the leasing company; it's a guarantee that your vehicle will be worth at least
that much when the lease is over. It is written on paper but it is set in stone.
does this mean to you?
means the value of your leased car has a floor under it. You need not be concerned
about a depressed market down the line or a sudden drop in market value. New models
are coming to the market faster than ever. The trend is to have added content
without a parallel price increase. In short: a better value. This devalues the
older models instantly.
are you affected?
you and your twin sister live in the same town, buy from the same dealer and both
fix your desires on the same car model.
She buys, you lease. (You are not
sister's car payments are greater than yours. She says she doesn't care because
she is buying a car; you are paying for use.
After two years a hot new model
of your car hits the auto shows. Both of your cars are suddenly dated, worth far less as used cars. This worries your sister at first, but then she keeps
her cars for a long time anyway. The market doesn't matter to her. She says.
next year you both have reached the end of your payments. She owns her car. Your
lease is over. What do you have? Choices.
residual value in your contract is now higher than the real market value of your
car. You'd be a fool to pay that much, so you don't. You take the car back to
you can leave it, dust your hands and take a taxi home. Or you can negotiate with
the leasing company to buy the car at a lower price than the residual value. You
are in the strongest position possible. The lesser knows the car is worth less
than the guaranteed price and if he takes the car back (which he has to if you
don't want it) it would be resold in a depressed market. He can sell it to you
and avoid the hassle. Indeed, some leasing companies have been know to take the
initiative and call a lessee with an attractive offer as the lease nears its end.
you reach an agreement, you and your sister both own cars, except that you've paid less than your sister has.
OR you can lease something else; maybe the newer model. With about the same outlay
as your sister you'll be driving a car three years newer. And you'll be guaranteed
another residual value giving you a window on the future.
different scenario: Say the market value of your car at lease end is actually
greater than the listed residual value. More choices: you can buy the car at the
stated price, sell it and make a profit; or you can buy it and keep it. (Still
having paid less than your sister.)
twins were actually paying for quite different things for their cars: the
buyer was paying for the entire car and its depreciation; the lessee was paying
for the difference between the original price of the car and its residual value.
Looked at this way, it is understandable that leasing an expensive car that holds
its value can cost less than leasing a less expensive car that does not.
the catch? None really, but still leasing is not for everyone.
a brief profile of a poor candidate for leasing:
idea of ownership ("mine, all mine!") is important to you.
like to personalize your car with special wheels, add-on gadgets, engine performance
are really hard on cars collecting dings, dents and scratches while your dogs
are tough on the interior.
really rack up the miles (upwards of 25,000 a year.)
may not be able to fulfill the contract.
as you cannot express your extreme decorating tastes in a rental property you
cannot customize a leased car unless you want to pay serious damage fees. And
some leasing companies are very strict about what constitutes a well cared for
car. (Be sure you understand how strict before you lease.)
can cost you dearly, too, if you drive more miles annually
than is stated in the lease. Those extra miles are treated
like rental car miles. When you negotiate your lease
make certain you are accurate in your mileage estimate.
Higher miles raise your monthly payments but saves in
the long run.
most car leases specify annual mileage of 10,000 to 15,000, a lessee who wants
as much as 25,000 miles can get it from most leasing companies. Furthermore the
lessee will come out better in the long run than a buyer who drives that many
miles. The more expensive the car,the greater the lessee saves over the buyer.
Again — realistically specify the mileage up front so the cost of the miles is
built into the lease. This costs appreciably less than you would pay for excess
miles at lease end.
be as sure as you can be that you will be able to make your monthly payments for
the full term of the lease. A car lease is a firm contract and terminating it
early will cost you dearly.
Another drawback to leasing loomed in a recent
court decision in New York State which could make it easier for manufactures to
renege on warranties. The law, which puts the power of the federal government
on the side of the car owner, uses the term "buyer." New York's Court
of Appeals strictly interpreted that to exclude a lessee. Other states could follow
that lead. The case involved the lessee of a Jeep Grand Cherokee, a vehicle that
turned out to be seriously flawed. After many failed attempts to set it right
DaimlerChrysler refused further warranty claims. The court decided in their favor.
laws still apply whether a car is bought or leased.
a profile of a good candidate for leasing:
want the same monthly payment to put you in a more expensive car than you can
get credit to buy outright.
important to your image or your business to have a new vehicle every two to four
would rather invest your money than tie it up in a large down payment and high
take good care of a car.
know about how many miles you will drive each year.
like knowing exactly how much your car will be worth at lease end, regardless
of market or currency fluctuations.
like to avoid haggling with a dealer over the value of your "trade-in"
when it comes to acquiring another car.
leasing begins to look like a no-brainer, then hold
on for a moment. As Fred Vang, a Personal Automotive
Consultant in Santa Fe, NM warns: "It must be a
good lease." He is a great proponent of leasing
but he has guided many clients through the perils that
can spoil a transaction. "There are more shells
in the game in leasing than in buying," he says,
so the lessee needs be diligent.
are the qualities of a "good lease":
purchase price on the lease (called "cap cost" for capitalized cost)
should be the same (or less) as the outright purchase price of the vehicle.
interest (or "money factor") should be the same (or less) as that of
the best rate for a car loan to buy the vehicle.
lease must be "closed-end" meaning the contract states
what the car will be worth (residual value) at lease end.
stated miles-per-year usage must be realistic.
the fees (disposal fee of around $250) and costs must be expressed and any "promises"
must be in writing.
lower the monthly payment, a salesman might suggest stipulating lower annual mileage
(12,000 miles is a common figure). It happened to a daughter of one of Fred's
clients. The salesman dropped the amount to 10,000 and told the son-in-law: "Don't
worry about that. We can deal with it when you return the car." At lease
end the extra miles on the odometer more than wiped out any savings made on monthly
payments. Just as the salesman (long gone) had known it would, but he wanted
to close the deal.
not count on anything verbal; what's written is gospel.
you sign have any contracts vetted by someone knowledgeable about leasing contracts.
sure the contract accurately reflects anything you agreed on verbally.
whether you lease, finance or buy outright, play it cool:
Do your research and know your car and its value.
negotiate based on monthly payments.
Do not mention a trade-in until the new car price is settled.
anything else car shoppers should know? "Yes. Rebates
and incentives change the picture almost daily. Keep
abreast of these for the best deals however you plan
to pay for your car."