Buy or Lease? What should you do?

Times Changed At one time, nearly everyone bought their new cars directly from a dealership.  Only those individuals that were driving a car for business purposes were leasing their vehicles.  Today that's all changed, and a growing number of individuals are now leasing instead of buying.

Buy or Lease? At the one end of the spectrum there are individuals that like the idea of driving a new car every two or three years.  At the other end of the spectrum are people that decide to buy a car based on simple economics.  For anyone that's sitting at either of these two ends of the spectrum, the decision to buy or lease a car should be an easy one.

Advantages of Leasing One of the primary reasons many individuals lease their cars is the satisfaction they derive from driving a new vehicle every couple of years.  But there are also some other advantages of leasing a car that are worth discussing too.

Leasing Advantages (cont’d) Most leased cars are returned to the dealership before the manufacturer's warranty has expired.  That means most of the expensive repairs, such as installing a new transmission, never come into consideration when leasing.  In addition, due to the mileage cap provision of the contract, the car usually has relatively few miles.  This makes it a very reliable source of transportation.

Leasing Advantages (cont’d) Another big advantage of leasing a car is the lack of financial commitment to the vehicle. Most agreements include a capital cost reduction payment, which is similar to a down payment made when buying a car.  The capital cost reduction payment (security deposit) is relatively small, and quite affordable, in comparison to a down payment.

Leasing Advantages (cont’d) Finally, the other big advantage of leasing a car is the tax deduction that may be taken if the vehicle is used for business purposes.  The tax laws have been tightened in recent years, but in general, when the car is driven for work-related purposes, the cost of operating the vehicle is deductible from federal income taxes.

Advantages of Buying As mentioned earlier, perhaps the biggest advantage associated with buying a car has to do with economics.  Several more advantages are discussed in the following, but most of these revolve around money matters.  In the long run, it's less expensive (cheaper) to buy a car than to lease one.

Buying Advantages (cont’d) During the first year of ownership, the loss in the car's market value is the greatest.  In general, depreciation for a car slows as it ages.  When leasing a car, the monthly payment needs to account for this high rate of early-life depreciation.  When buying a car, the longer it's owned, the lower the average annual depreciation rate.

Buying Advantages (cont’d) Another advantage of buying a car is that when the loan is paid in full, the car is owned, which is an asset.  If the owner were to fall on hard financial times, they can sell the car for another asset:  cash or money.  If someone can no longer afford their monthly lease payment, they will need to pay some fairly expensive termination penalties

Lease vs. Buy Decision Some people might point out the added maintenance expense associated with aging cars is being ignored in the previous pros and cons.  It's true, as cars age they will start to experience a higher rate of mechanical failure.  But in many cases, even an expensive repair is less costly than continuing to make monthly lease payments

Your Decision What will you do?