Should I Lease or Buy a Car?

If you are evaluating whether to lease or buy a car, you need to be aware of all the costs.  And, what are the pros and cons of leasing versus buying?

Leasing advertisements focus on the monthly payments which are usually much lower than that of car loans. The lease terms are shorter and often require a large down payment. There are usually additional fees and penalties related to the lease such as penalties for exceeding mileage. At the end of the lease, you don’t own the car or have any car payments..unless you’ve exceeded the mileage allotment.

Auto loan terms vary in the number of months/years to pay off the loan and can be customized to match your budget. You can lower the payments by making a down payment or offering a trade-in. You own the car at the end of the loan, but by that time you may have large repair bills and the car is likely out of the warranty period.

Leasing Advantages

• Can walk away from the car at end of lease – You don’t own the car.
• Shorter payment terms – Car leases range from 24 to 48 months.
• Can have a new car every 2 to 3 years – Since the leases are short, you can drive a new car often.
• No repair bills – The car is almost always going to be covered by a factory warranty.
• Tax deduction – If the car is used for business, the lease payment may be tax deductible.

Leasing Disadvantages

• You own nothing after the lease ends – And, you’ll likely have to buy or lease a new car.
• Penalties at end of lease – There are penalties for excess mileage over the maximum of 10,000, 12,000 or 15,000 annually.  There are also charges if all tires don’t match.
• Purchase price is unreasonable at end of lease – You’ll may have to finance the purchase price if you want to buy the car and the price tag is usually very high.  Your payments have not been applied against the value of the car.
• High down payment – Many leases require a down payment of at least $2,000.
• Interest rates – Interest rates are usually higher for leasing than buying.
• Additional fees added to the lease – One of them is an acquisition fee of $250 to $750.

Buying Advantages

• You own the car – When the loan is paid, you own it.  Congrats!
• You have equity in the car – You can apply this to a trade in if need be.  You can also borrow against your car’s equity if need be.
• Pay less in interest – Interest rate is usually lower and overall you’ll pay less in interest.
• Have longer terms for car loans – Loan terms can be up to 6 years and have longer time to pay it off, if needed.
• No car payments – At end of loan, you owe nothing on the car.  You can buy another car, or drive it until it falls apart and save by not paying new car payments.  BEST OPTION!!

Buying Disadvantages

• Longer payment terms – There are many options for the payment terms which can be up to 6 years to keep the monthly payments lower.
• Higher monthly payment – The entire amount of the car is financed (minus down payment or trade in), so the monthly payment will be higher.
• Major repair bills as the car ages – The older the car, the more chance that repair bill will be costly.
• Cannot deduct interest –Auto loan interest is not deductible from your income taxes.
• Higher taxes – Sales tax is paid when you purchase the car and paid at that time.

Some points to remember

The car depreciates the same whether you lease or buy. In fact, a car is the worst investment you’ll ever make because it will eventually depreciate to $0.  If you want to buy the car at the end of the lease, you will owe a large payment which you still may have to finance.  You have nothing for the money you spent on the lease. You need to evaluate your attitude towards a car – is it for transportation or do you like driving a recent model?  If you like to drive a new car every few years, leasing may be for you. If not, you should buy.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Auto Loans, Debt, Getting Credit, Money & Identity

This post was written by John Ulzheimer