Should You Lease a Car or Buy a Car?

by Don Elliott on January 3, 2012

A large portion of car value is from the cost of financing. When shopping for a new car, shopping for financing can make the difference between a good new car value and a bad deal on an otherwise good car.

For people with good credit, leasing provides an excellent alternative to conventional financing. However, you should fully understand leasing before deciding if it is right for you.

There are at least five points of negotiation in an automotive lease agreement. Understanding the true cost of the lease is essential when comparing leasing to conventional financing.

Point #1 – Purchase Price: The Internet is an excellent place to start when shopping for a new car. Several websites including www.truecar.com,  www.edmunds.com,  and www.kbb.com are used for car shopping advice. Sites like these can help you decipher what price car dealers might be willing to sell the cars. It is important to know how much you will need to pay for a new car including rebates and incentives if you plan on buying it without negotiating the finances. If you are going to trade in a car for the new car, it will be necessary to establish the used car value to determine the net difference. You do not have to pay window sticker when you lease a car. Establish your best purchase price before negotiations begin for financing.

Point #2 – Interest Rate: Leases carry an interest amount on the cost used to finance the lease. Typically, leases are financed in new car dealerships by financial institutions controlled by the manufacturer. The lease factor, or the lease financing costs, is likely about 2.8% in the current marketplace. However, this will vary by manufacturer.

Point #3 – Down Payment and Drive-off Fees: Leases are often advertised with very attractive monthly payments. Read the fine print to get the actual cost of the lease. For example, a monthly payment of $149 for a 36 month lease might require $3,600 up front for down payment and fees, or an extra $100 per month when applied to the payment. Down payment and most fees are negotiable upfront. Most leasing experts recommend $1,000 as a reasonable down payment towards the lease. More or less is up to you, but don’t jump on a payment without realizing the true costs

Point #4 – Per Mile Costs: One of the disadvantages about leasing is that there is a cost for miles driven. Most leases include 12,000 miles per year with the lease. Low advertised monthly lease payments might include only 10,000 miles per year. Determine how many miles that you expect to drive and make sure that number is included with the lease payment calculation. It is cheaper to buy extra miles up front than to pay a penalty at the end of the lease.

Point #5 – Lease Term: In general terms, leasing pays for the part of the car that has been used. At the end of the lease term, you will have the option to buy the car from the leasing company (the residual value) or turn it back and walk away. More often than not, a car with a very attractive monthly lease payment also has a high residual value. Residual value is the expected worth of the car at the end of the lease term. Residual value is generally not negotiable. Lease terms vary widely along with the residual value of the car based on the expected car value at some point in the future. For most people, a 36-month lease makes the most sense. Longer lease terms usually suggest that conventional financing is a better way to go.

Make sure that you buy gap insurance when you lease. Most leases require gap insurance, but read the fine print to make sure that it is included with the payment. If it is not, buy it separately. An attractive lease payment could get very expensive if your car is stolen or badly damaged in an accident.

Finally, review possible tax advantages of leasing versus buying with your tax adviser. Consider the tax implications as part of your shopping comparison.

 

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