Leasing vs. Buying a New Car Buying a vehicle with a conventionalcar loanis pretty straightforward: You borrow money from a bank, credit union, or other lending institution and make monthly payments for some number of years. A chunk of each payment is interest and the rest is principal. The higher the interest rate, the higher the payment. As you repay the principal, you build equity until—by the end of the loan—the car is all yours. As car prices rise (now averaging over $47,100and buyers start to demand the latest safety features that are available only on newer cars,leasinga vehicle has become a mainstream alternative to buying. With a lease, buyers make a monthly payment to drive a new car for a set term. That payment is often less than the monthly cost of financing a new vehicle, but buyers must return the car at the end of the lease term. The Upside of Leasing On the surface, leasing can be more appealing than buying. Monthly payments are usually lower because you're not paying back any principal. Instead, you're just borrowing and repaying the difference between the car's value when new and the car's residual—its expected value when the lease ends—plus finance charges. The Major Advantages of Leasing • You drive the car during its most trouble-free years. • You're always driving a late-model vehicle that's covered by the manufacturer's warranty, which may include free oil changes and other scheduled maintenance. • Having a predictable monthly payment with no surprise repair costs can make it easier to stick to a household budget. • You can drive a higher-priced, better-equipped vehicle than you might otherwise be able to afford. This may allow you to opt for lifesaving safety features that aren't available on lower trims or used cars. • You don't have to worry about fluctuations in the car's trade-in value or go through the hassle of selling it when it's time to move on. • At the end of the lease, you just drop off the car at the dealer. Disadvantages to Leasing • In the end, leasing usually costs you more than an equivalent loan, if only because you're always driving a rapidly depreciating asset. • If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after the loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until it's uneconomical to repair.
• Lease contracts specify a limited number of miles. If you go over that limit, you'll have to pay an excess mileage penalty. That can range from 10 cents to as much as 50 cents for every additional mile. So be sure to calculate how much you plan to drive. You don't get a credit for unused miles. • If you don't maintain the vehicle in good condition, you'll have to pay excess wear-and-tear charges when you turn it in. So if your kids are apt to go wild with the magic markers or you're a magnet for parking lot dents and dings, be prepared to pay extra. • If you decide that you don't like the car or if you can't afford the payments, it might cost you. You will probably be stuck with thousands of dollars in early termination fees and penalties if you get out of a lease early—and they'll all be due at once. Those charges could equal the amount of the lease for its entire term. • With a few exceptions, such as professional window tinting, you need to bring back the car in "as it left the showroom" condition, minus usual wear and tear, and configured like it was when you leased it. • You're still on the hook for expendable items such as tires, which can be more expensive to replace on a better-equipped vehicle with premium wheels. An Alternative to Long Loans Some car buyers opt forlonger-term car loans of six to eight yearsto get a lower monthly payment. But long loans can be risky, and these buyers might find leasing to be a better option. Longer loans make it easy to get "upside down"—where you owe more than the vehicle is worth—and stay that way for a long time. If you need to get rid of the car early on, or if it's destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe. Buying a car with a loan isn't the way to go if you want to drive a new car every couple of years. Taking out long-term loans and trading in early will leave you paying so much in finance charges compared with principal that you'd be better off leasing. If you can't pay off the difference on an upside-down loan, you can often roll the amount you still owe into a new loan. But then you end up financing both the new car and the remainder of your old car. If your goal is to have low monthly payments and drive a new vehicle every few years with little hassle, then leasing may be worth the additional cost. Be sure, however, that you can live with all of the limitations on mileage, wear and tear. Don't Forget to Negotiate Many people assume that the monthly payment printed in a leasing ad is etched in stone. But that figure may be based on the manufacturer's suggested retail price, which can be negotiated downward just as if you were buying the vehicle. Be aware, though, that the best lease deals are available only to those with superb credit, and that they may only be cheap because the automaker is trying to clear the decks of slow-selling cars.
BUYING LEASING OwnershipYou own the vehicle andget to keep it as long as youwant it.You don't own the vehicle. You get to use it but must return it at the end of the lease unless you decide to buy it. Up-FrontCostsThey include the cash priceor a down payment, taxes,registration, and other fees.They can include the first month's payment, a refundable security deposit, an acquisition fee, a down payment, taxes, registration, and other fees. MonthlyPaymentsLoan payments are usuallyhigher than lease paymentsbecause you're paying offthe entire purchase price ofthe vehicle, plus interestand other finance charges,taxes, and fees. Lease payments are almost always lower than loan payments because you're paying only for the vehicle's depreciation during the lease term, plus interest charges (called rent charges), taxes, and fees. EarlyTerminationYou can sell or trade inyour vehicle at any time.If necessary, moneyfrom the sale can beused to pay off any loanbalance.If you end the lease early, charges can be as costly as sticking with the contract. On occasion a dealer may buy the car from the leasing company as a trade-in, letting you off the hook.