Lease vs. Buy: Comparing Automobile Costs

For more and more people today, buying a car is not the only option. With people becoming less inclined to make a long-term commitment to purchasing a car, many of them are instead turning to leasing rather than buying. However, before making the final decision as to whether buying or leasing is the best option, there are many financial factors to take into consideration.

New or Used Cars?
One of the factors people need to consider when deciding between leasing or buying involves what type of vehicle they want to drive. Many people prefer leasing because it allows them to drive a new car every year or two, while others prefer buying outright and keeping a vehicle for several years. However, in most cases leasing is limited to new vehicles only, although some dealerships specializing in luxury vehicles will allow leasing on a limited basis.

Paying for the Car
One of the biggest differences between buying and leasing involves how much a person pays for the car. When leasing a vehicle, a person only pays a portion of the car’s total value, which is considered to be the part of the car that gets used up during that period. However, when buying a car, the buyer pays for the total cost of the vehicle at the time of purchase. Leasing also offers the option of making no down payment, requires sales tax be paid only on the total of the monthly payments, and requires the first payment be made when the contract is signed. When buying a car, the person pays for the entire value of the vehicle, and a down payment is usually required. On average, payments on a car that is purchased are significantly higher than lease payments. In fact, monthly payments on a purchased car range from 60-110 percent higher than lease payments.

Lease Payment Charges
Lease payments consist of two parts, a finance charge and depreciation charge. The depreciation charge is used as compensation for the leasing company, letting it recoup the amount of the car’s value that is lost during the leasing period. The finance charge is essentially interest paid on the lease to offset the money the leasing company has invested in the car. Part of the money is paid back through the monthly payments, while the remainder is paid back at the end of the lease when the car is purchased outright or is returned at lease-end.

Loan Payments
Although similar to lease payments, auto loan payments differ slightly. Consisting of a finance charge and principal charge, both payment arrangements have money paid out by the buyer that the person never recoups. This is due to the fact that all vehicles, whether leased or purchased, depreciate by the same value over time. By doing so, the principal charge of a loan payment is essentially the same as a depreciation charge in a lease agreement.

The Money You Save
According to financial experts, leasing presents an excellent opportunity for people to take the additional money they would have tied up in loan payments and use it for other means. For example, many people take their savings and invest the money in CDs, stocks or mutual funds, while others choose to use the money to make mortgage payments or pay additional bills.

Always Negotiate
As most people know, negotiating the price of a vehicle is an American way of life. However, some dealers occasionally imply or state that the price of a leased vehicle cannot be negotiated, which is never the case. The price of a vehicle, whether leased or purchased, can and should always be negotiated in order to get monthly payments as low as possible.

When trying to decide between leasing or buying a vehicle, taking these and other factors into consideration can make the task much easier.