Shopping for a new car today can be a daunting task. Not only are there many more vehicles available today than ever, there are also many more ways to pay for these vehicles. The decision whether to lease or buy is often a difficult choice for many consumers. We will examine the pros and cons of both to help you find the option that is right for you.
Leasing Benefits
Automobile leasing is not an entirely new concept. Leasing has been around for decades but did not peak in popularity until about 10 years ago. The concept of leasing is simple: a car is financed for a specified term (often 24, 36 or 48 months), and returned to the manufacturer when the term is over. The amount that a consumer pays for a lease is based upon the residual value (projected value at the end of the term) and the manufacturer's suggested retail price (MSRP). If a new car is $20,000 and its residual value is $12,000 after 2 years, then a consumer will pay $8,000 over 3 years to lease the vehicle (plus taxes and finance charges). The residual value is usually reflected in percentages, such as 60 percent. The particular vehicle described above would have a 2-year residual value of 60 percent. The higher the residual percentage, the less a consumer must pay to lease the vehicle. Leasing can be a smart option for consumers that like to "trade up" every couple of years. This avoids the usual depreciation factor in a new car purchase and prevents you from being upside down (owing more on a car than what it is worth). Other benefits of leasing include: always driving a late-model vehicle, always having an existing factory warranty, and usually having lower monthly payments than if you purchased the vehicle with an auto loan. Leasing may also have some attractive tax incentives for businesses.
Purchase Benefits
Traditional purchase and financing options are better known to most consumers. Purchasing can be a great alternative to leasing for someone who tends to keep her vehicles for longer (i.e. years after they are paid for). The benefits of purchasing include owning the vehicle outright once it is paid for and having the freedom to do whatever you would like to do to the vehicle (such as install accessories). Those who own their vehicle also never have to worry about mileage limitations or wear-and-tear fees.
Leasing Cons
In addition to many benefits, there are many cons to leasing. When you lease vehicles, you never have an opportunity to drive a vehicle without payments. You may also be subjected to special contract provisions of the manufacturer, such as keeping the factory equipment intact or servicing the vehicle at the dealership. Leasing can also be a costly venture if you exceed your mileage limitations. Manufacturers usually have "per-mile" charges once you exceed the allowable mileage (some as high as 25 cents per mile). If a leasing option is not available that suits your annual mileage, you should think twice about leasing.
Purchase Cons
When you purchase a vehicle, you make are making a large commitment to it. First-year depreciation can be steep, even on vehicles with excellent resale value. If you make a commitment to purchase a new car, you need to plan on keeping the vehicle for a while. When consumers try to trade out of their auto loans only a couple of years into them, they often find themselves "upside down" or "underwater" (owing more on the car than what it is worth).
Determing Factors
When trying to decide which option is best for you, it is often a good idea to ask a series of questions to determine how the vehicle will be used and how long you plan on keeping it. If you plan on keeping a vehicle for a number of years, and feel that it will meet your needs for that amount of time (room, comfort, reliability), than you may be better off with a purchase. If you like to trade up often and do not mind constantly making payments then a lease could be the way to go.
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