THE SHORT ANSWER
- Lower monthly payments are a priority and you don’t care about building ownership equity in a vehicle.
- You enjoy driving new cars that have the latest safety features and are always under warranty.
- Your life situation is fairly stable and predictable over the next few years.
- You drive around 15,000 miles annually and properly maintain your cars.
- You’re willing to pay more over the long haul for the convenience of leasing.
- You have good credit.
- You’re self-employed and have business or tax reasons for leasing rather than buying.
- You don’t mind making higher monthly payments and building up trade-in or resale equity matters to you.
- You are prepared to pay for unexpected repairs after warranties expire.
- You drive significantly fewer or more than 15,000 miles annually.
- You anticipate lifestyle changes in the near future.
- You look forward to owning a car without payments.
- You want to customize your car or don’t like the obligation of carefully maintaining someone else’s car.
- You like knowing that you own the car you drive.
Whether you should buy or lease a car is a confusing question — more so today than ever before. With car makers doing everything they can to move inventory, interest-free financing and generous cash-back offers have become strong competition for the low monthly payments and layoff protection plans traditionally provided by leases.
Just a year ago, lower used-vehicle values combined with the credit crunch to make lease payments so high that very few car-shoppers chose that route. Last summer, Chrysler and General Motors abandoned leases altogether. But the times are changing again, and lease promotions are making a come-back, along with tempting new deals on the purchase front.
Lease payments may not be as low as they once were
Historically, the great appeal of leasing has been the low monthly payments. When you lease a vehicle, you don’t pay for the vehicle itself; you pay for depreciation over the lease term.
In the past, automakers subsidized leases by inflating the residual values of leased vehicles, and calculating lease payments on artificially low depreciation figures. If, for example, a new vehicle worth $30,000 was expected to have a residual value of $15,000 at the end of a four-year lease, an automaker might give it a $22,000 residual value and base payments on depreciation of $8,000 rather than $15,000.
Leasing this way used to be profitable because automakers were able to take the cars in and sell them to get back what was invested. But that situation has changed, largely because fuel-inefficient SUVs and pickups — which were popular lease vehicles three or four years ago — are now worth very little at lease end.
Today, more lease customers will be dealing with independent financing companies. They may still enjoy lower monthly payments, but the savings won’t be as great as they were in the past. The end result may be that lease customers will still come away with monthly savings, but they’ll get less car. They’ll no longer be able to lease those high-end luxury cars they could never afford to buy.
Answering the question with questions
To help you make a decision about whether to buy or lease your next car, trying crunching the numbers in an online lease-or-buy calculator like the one at Leaseguide.com, but remember that generous incentives and payment plans are only the first factors to consider. Other factors to be weighed include your credit score, the length of time you plan to keep the car, your life-style priorities, and the miles you expect to drive.
Before you decide whether to lease or buy, ask yourself these questions:
- What’s important to you?
- How’s your credit?
- How’s your cash flow?
- How many miles do you drive?
- How carefully do you maintain your car?
- How soon will you want a new car?
- Will you want to buy the car at the end of the lease?
- Do you use your car for business purposes?
- How well can you see into your future?
- Are you a fan of gap coverage?
Are low-upfront costs and no down payment more important to you than owning a vehicle? Are lower monthly payments and no car at the end of a lease term more appealing to you than higher monthly payments and a car that’s yours at the end of a loan term?
Is getting a new vehicle every three or four years and having a car that’s always under warranty more desirable than paying off a vehicle, taking repair risks, and having no car payment for a while? Is the convenience of walking away from a vehicle at the end of a lease term more important to you than the ability to sell your old car and buy a new one whenever you want?
Most people buy rather than lease. But leases have advantages, and if low monthly payments, new vehicles, and warranty coverage, are important to you, you may be a good candidate for leasing.
Lenders have stricter credit requirements for leases than they do for car loans. In accepting or rejecting automobile financing requests, most lenders employ a five-tier credit rating system. Generally, only borrowers in the top three categories are approved for lease financing.
One of the most attractive features of a vehicle lease is that it generally requires only a small investment upfront. Typically you need only $1,000 or $2,000 to cover the first month’s payment, a refundable security deposit, and various upfront fees. Sales tax is included in the monthly lease payments, and sometimes the upfront fees can be spread out over the monthly payments, as well.
On the other hand, financing the purchase of a vehicle can require a down payment of 10% or more plus sales tax of 6% to 8%. The upfront investment needed to purchase the car will eventually help build up your equity in it, but many people have more pressing needs for their cash.
The ideal vehicle-lease candidate drives 12,000 to 15,000 miles a year. The miles that you are allowed to drive a leased vehicle each year are limited, and the annual mileage allowances of most leases fall within that range. If you drive substantially less than that, you are, in effect, paying for vehicle depreciation that does not benefit you, and you should consider buying.
If you exceed that range you will have to pay an agreed amount per extra mile at the end of your lease term. If you expect to drive more than the allowed miles, you should consider buying; or, at a minimum, you should try to negotiate extra miles up front. A leasing company may, for example, charge 15 to 20 cents per excess mile at the end of a lease, but only 10 cents per mile if you purchase excess miles at the inception of the lease.
The ideal vehicle-lease candidate maintains a car, inside and out, in top condition. If you’re rough on a leased car, (and rough can be surprisingly easy to achieve), you may have to pay for damage at the end of the lease term. Of course, if you’re rough on a car that you own, the damage will affect its resale value as well.
But in the case of a lease, you’ll have to come up with cash to pay for excess wear and tear.Before you sign a lease agreement, take a close look at how it defines normal wear and tear. Also, make sure there is a limit (typically the sum of three months’ lease payments) to how much the lessor can charge for excess wear and tear. If your lease is open-ended in this regard, negotiate a reasonable limit or move on.
Leasing can be the right choice for someone who wants a new vehicle every three or four years. Leases allow you to move from one car to the next without drastically changing your monthly expenses or spending habits. This may not be the best reason to lease a car, but the decision to lease or buy is as much a lifestyle choice as it is a financial judgment. Leasing, however, will tie you down if you want a new car every year. And, on the other hand, if you want to keep the car at the end of a least term, it can be very uneconomical to do so.
Even though lease agreements give you the security of a locked-in value for purchasing the vehicle at the end of the lease term, financing the purchase of a vehicle after making lease payments on it for three or four years rarely makes good economic sense. If you purchase a leased vehicle at the end of a lease, the long-term cost of leasing is always greater than the cost of buying the same vehicle in the first instance. If long-term savings were the only objective, it would always make sense to buy a car and drive it for as long as you can or until repair costs begin to exceed the cost of buying another car.
If you’re self-employed and use a car for business, you may be eligible to take automobile deductions on your income tax returns; and if so, your deductions may be more favorable if you lease. Interest paid on vehicle-purchase loans is not deductible. But when you lease, you can sometimes write off entire lease payments, although there are limitations for certain luxury cars. Check with a tax professional about the possible tax advantages of leasing.
Changing jobs, getting a divorce, or moving to a new home can make what once seemed like a low lease payment completely unmanageable. But backing out of a lease is expensive. Backing out of a lease is like selling a car when you’re upside down on the loan – that is, when you owe more than the car is worth.
When you terminate a vehicle lease before it expires, you pay hefty penalties, sometimes as much as six extra months of payments.Ask yourself how sure you are about where you’ll be and what you’ll be doing in the next few years. If you think major changes may be on the way, consider buying rather than leasing; and if you buy, consider buying in a price range where your available down payment will be significant enough to prevent you owing more on your loan more than the car will be worth.
Remember, early termination of a lease can sometimes be involuntary, such as when the car is stolen or totaled. Early termination fees under a lease agreement are significant. Some kinds of gap protection plans cover early-termination penalties as well as the outstanding lease balance in cases of involuntary termination.
Gap protection is automatically included in many leases and the premiums for it are incorporated into the monthly payments. If you lease – or if you buy a car without a significant down payment — you should make sure you have a comprehensive gap protection plan.