by David Tarlo
8/11/2006 There are three ways to “buy” a car. These are: cash, loan, or lease (a lease is a different form of a loan). Each is similar in ways and yet different. Before getting to the details of the pros and cons, one point should be made. When paying cash or taking a loan, the car is your property at a point in time. When leasing a car, the car is borrowed for the duration of the contract, its rented and is never yours. If you want to own the leased vehicle you will have to “buy” the car for its remaining value (residual value) at the end of the lease.
OK, you buy the car for cash. Simple! Negotiate the price, pay the car dealer, and the car is yours to do with as you please. Fine! Next you get a car loan. You negotiate again, you reduce the price and get favorable loan terms because of your good credit score and your down payment. You sign on the dotted line and, for all practical purposes, the car is yours to drive any where, anytime, anyhow you want. Legally the car isn’t yours for another 24, 36, or 48 months. Finally, you lease the car, which only just entitles you the privilege to use the car for a certain predetermined distance and length of time, 24, 36, or 48 months, etc…
If you buy a car for cash your choice of models is limited by the cash on hand. A loan allows you some freedom to choose beyond your bank account, while a lease can enable you a choice well beyond your means. Assuming your income is sufficient and your credit score is good, you could easily drive home from the dealer’s lot with a different and more expensive vehicle with each of the cash, loan or lease purchase transactions.
These different paths toward acquiring a vehicle will also determine your insurance and maintenance options. Buy the car for cash and you can insure it any way you want, or not at all. Want to take it for maintenance or not… it’s up to you! Get a loan and you will have to have car insurance with some theft, fire and collision coverage, but the deductible is up to you and the maintenance is still up to you. But, if you lease the car, you are required to carry a more expensive comprehensive insurance policy with lower deductibles and to maintain the car following a specific schedule. The leased vehicle is expected to be returned in near new condition when the lease term is over.
The major costs to automobile ownership, other than gasoline and oil, repairs and parts replacement, are depreciation, finance cost, and insurance cost. Comparing the three acquisition transactions just discussed, leasing is the most expensive on all fronts. The lease term coincides with the time of the greatest depreciation in an automobile’s value, the first two or three years. Certain expensive vehicles depreciate more than less expensive vehicles, so your choice of a vehicle can increase or decrease the cost of a lease. Interest charged on a lease is generally higher than a conventional loan, and when the lease is over there is no equity built in the vehicle unless it is repurchased.
Considering transportation and its long term costs, a cash purchase is the most economical choice, while the lease option is the most expensive choice, and the conventional loan is somewhere in the middle. Bear in mind that both a loan and a lease can be more or less expensive according to decisions that you make, the vehicle you choose, various promotions or sales, tax-period promotions, manufacturer incentives, the dealer you choose, and your credit score can tilt the costs one way or another.
In addition to that, you must be weary of the (lease) contract and study it well, as there are complicated variables, hidden costs, and potential “scams” possible with the way these contracts are drawn up. Always read and double-check, making sure you understand that what you agreed to is what is drawn up in the contract. In 1998, federal regulations requiring dealers to disclose information about the terms and costs of a vehicle lease took affect. A Federal Consumer Leasing Act Disclosures form should be presented to you listing the various costs and fees.
Let’s take a look at other pro’s and con’s to leasing vs. buying a car.
Leasing Pros
• Lower initial cost can be negotiated if your credit score is high, minimizing the potential loss of capital for other purchases or emergencies. In some cases you can get the car with no money down.
• Leasing is a way of driving a car you could not afford to purchase. Definitely an impressive tool if it can increase your worth and enhance your career.
• Generally, the monthly payments are lower. The payment reflects depreciation and other costs over the shorter time period of the lease and not against the entire value of the car, therefore, your monthly payment is less than that for a conventional loan.
• Leasing is a good idea if you get bored with a car every few years, or being seen driving a new car is important. This is entirely ego and self-esteem driven, so if you must… you must. It may be cheaper than going to a psychiatrist over the long haul.
• In some cases, leasing is a legitimate, tax-deductible business expense. If the car is dedicated to business use, and you maintain good records of use and mileage, you can deduct most if not all associated costs.
• If your driving range is limited, 15,000 miles per year or less, leasing may be a valid option. For someone who only needs a car for short trips and doesn’t want to pay the entire cost of a car.
• Leases can be negotiated as any vehicle purchase can. If you prepare well, negotiate as if you are buying the car and reduce its initial value and thereby reduce your monthly payments.
• Leased new vehicles carry manufacturer warranty. It is important to make sure the warranty is spelled out, and that your lease does not exceed the duration of the warranty.
• Leased vehicle may be purchased at the end of the contract period. This is the purchase option. If you can’t part with the car, you can buy it and it’s yours.
Leasing Cons
• Leasing a vehicle is more expensive in the long term. A well maintained car, manufactured in recent times can easily last seven to ten years. In those seven or ten years three or four vehicles would have been leased at a constant flow of money from your pocket to the dealer’s pocket.
• Interest on a leased vehicle is generally higher. The lease is structured so the principle or base cost (depreciation), on which the interest is calculated, remains fairly constant. Therefore, the interest remains relatively high. In a conventional loan, the principle declines as payments are made and the interest declines proportionally.
• There are significant penalties for driving beyond the mileage limitation. Unless stipulated in the contract, the mileage driven per year is specified. Once that mileage is surpassed, penalties accumulate that will be charged to you per mile.
• Leased vehicles are more expensive to insure. As stated above, the vehicle must be well insured with high coverage for liability and property damage and a low deductible in order to protect the investment the dealer and you have in the car. In some cases Gap insurance and Credit life or disability insurance are recommended.
• Leased vehicles require more maintenance. In order to maintain the value of the vehicle, it must be maintained and be in sound mechanical condition. If the warranty is for 2 years, only lease the vehicle for 2 years. After the warranty ends, you will have to pay for all the maintenance and repairs.
• The vehicle has to be returned in near-new condition, with exception for normal wear and tear. What is normal wear and tear? Look out for the kid with the grocery cart in the parking lot?
• There may be very stiff penalties for terminating a lease early. Getting out of a lease is difficult. The lease is structured to keep you under contract or you are penalized for early withdrawal.
• No or little accumulated equity in the vehicle’s value unless it is repurchased. In the ten years I drive my jalopy, you would have leased three vehicles and still own none, and in the end I could get $150.00 dollars at the junk yard, not to forget payment free driving for about five or six years.
• The more expensive or popular the vehicle, the greater the depreciation, the higher the lease cost, the higher the interest. A car typically depreciates at least 40% in the first 3 years. Do the math if you start with a $60,000.00 dollar car versus a $15,000.00 dollar car.
Buying Pros
• Long term cost is lower. Factored over the length of time and the equity built into the vehicle, the longer one owns a car, the cheaper it is.
• Vehicles dedicated to business use are tax-deductible. As with a leased vehicle, a vehicle dedicated to business, with good record keeping can be entirely tax deductible.
• A new vehicle carries a warranty. All new vehicles, bought or leased, are warranted by the manufacturer.
• Purchased vehicles build equity as trade-in or resale value. A working vehicle can maximize a person’s financial resources and save hundreds in monthly payments. With time, as the dollar weakens and everything becomes more expensive the old car actually becomes more valuable.
• Insurance costs are lower. As stated earlier, insurance coverage and deductible levels are entirely up to you. No one can force you to buy the most expensive insurance package if you don’t want to.
• The owner may do as he or she pleases with the vehicle. Well, not that anyone would want to enter this car in a demolition derby, but with ownership, one could. A leased vehicle should be in near new condition, less “normal” wear and tear, at the end of the lease.
• There are no mileage limitations. If you want to drive from Houston, Texas to Banff, Canada and back, you can without penalty.
• A well maintained vehicle may last many years. Today’s industrial and engineering innovations have improved the longevity of automobiles so that with care and maintenance a vehicle might last a decade or longer, making it ridiculously economical even with the rising cost of fuel!
Buying Cons
• A person may not be able to afford the vehicle he or she wants. True. What can one do? If it’s that important, lease the car!
• A person may not be able to trade the vehicle as often as he/she would like. Also true, money in hand or conventional loans limit the frequency with which one can trade to a new vehicle.
You can also read an article Buying a New Car for additional information and tips on vechicle buying.
Whatever choice you make, we hope it is the best one for your particlular situation! Good luck with a new vechicle!
 print
send to friend
 More articles by this author
|
FAST FACT
