Getting a new vehicle involves a lot of decisions, such as what type of vehicle to buy and where to shop. In addition, it’s a good idea to compare the pros and cons of buying versus leasing a car. We’re actually ready to embark on replacing our older model Honda Odyssey van. We’ve contemplated on the possibility of buying vs leasing recently, and following is what we’ve come across —
Leasing vs Buying A Car: Things To Consider
Buy vs Lease? That is the question. Let’s go through some arguments.
What Buying A Car Entails
When you buy a car, you’re its outright owner. That means you can customize it the way you want and drive it without fear of paying a penalty for the extra miles. When you want to upgrade your vehicle later, you’ll be able to sell it. Also, with a car you own, you don’t have to worry so much when a family member drops a cup of grape juice on the backseat or if you don’t get to the car wash all the time.
Though buying a car will give you a lot of freedom, it’ll turn out to be one of the most costly expenses in your family budget. Unless you’re buying the car outright, you’ll need to figure out how much of a monthly payment you can afford. Also, some dealers will expect a sizable down payment.
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Once the vehicle’s warranty ends, you’ll have to pay for its maintenance. When anything from the tires to the radiator and the expensive beyond goes out, you’ll need to be prepared. If you’re the sort of person who doesn’t like the hassle of regular oil changes and the prospect of a worn-out vehicle in a handful of years, then you might want to hold off on buying a car.
Leasing Can Cost More
If you aren’t planning on owning a car forever, or you like to upgrade your vehicle every so often, then you might consider leasing a vehicle. With a lease, you pay a certain amount down, make regular monthly payments, then turn the vehicle back in at the end of the lease.
With a lease, you have access to a premium car without a long-term commitment to it. You can find cars for lease at local dealerships and online. You’ll find that the monthly payment for a leased vehicle might even be lower than the payments for a similar car that’s for sale. And maybe you won’t have to worry about regular maintenance of your vehicle as your dealership may offer that as part of your agreement.
US News and World Report compiled a list of the Best Car Lease Deals for January 2011. Among the deals are the 2011 Mercedes-Benz C-Class for $345 per month, the 2011 Honda Civic for $149 a month and Toyotas for under $250 a month. Most of these leases run for just 36 months or less. The amount you’ll need to pay at signing varies with the vehicle, but expect to pay at least a few thousand dollars.
There’s No Equity When You Lease
Of course, the biggest disadvantage of leasing is that when the lease period ends, you’ll have to turn in the vehicle. And you’ll have to start from scratch again. In contrast, a person who owns their vehicle outright can sell it, then put the funds toward their next vehicle. According to an analysis by Edmunds.com, leasing a vehicle can end up being almost twice as costly as purchasing a comparable used car over a five-year period.
Another snag that you may encounter if you lease comes in the form of the extra amount you’ll pay if you go over the total number of designated miles. For instance, if you signed a lease for 15,000 miles, but you ended up putting an extra 2,000 miles on the car, you’ll pay a penalty for each mile. Since this extra can go as high as 20 cents per mile, you need to pay attention to the odometer before going on lengthy trips. Or you can opt to buy additional miles at the start of your lease. Some leases offer extra miles at a rate of 10 cents per mile.
If you anticipate a situation where you’ll need to break a lease, then think twice before signing one. That’s because you may end up on the hook for the remaining payments of the lease, plus any additional liabilities. Go through the agreement and any additional paperwork thoroughly to understand your rights and the fees you’ll have to pay for the duration of the lease.
To assist you with the buy versus lease decision, Bankrate.com offers this calculator. It asks different questions about your driving habits, the type of cars you prefer, and the state of your credit before it suggests whether you should lease or buy your next car.
Before you and I decide on our next vehicle, we should take the time to go over the decision of buying versus leasing a car. Doing so should allow us to save money in the long run.
Disclosure: We have advertising relationships with some of the resources mentioned on this site.
Copyright © 2011 The Digerati Life. All Rights Reserved.
{ 7 comments… read them below or add one }
Leasing always sounds like a good deal. The monthly payments are low and you can get a sweet car, but in reality, it’s always more expensive. If it wasn’t, then there wouldn’t be a leasing business!
It’s best to buy your vehicle with cash. It gives you the freedom to do whatever you want with it, plus you won’t have to worry about exceeding your mileage limit. My wife and I purchased our 2002 Jeep with cash. We got a great deal, plus it will hold quite a lot of value after the next few years. We’ll sell it and be able to purchase something even nicer! 🙂
Well, do I dare ask why it’s necessary to replace your current vehicle. Honda is a fantastic product. I have a Civic w/196,000 miles on it and it functions perfectly well. Why replace when it would probably be significantly less expensive to maintain what you have?
Bob
I don’t know whether leasing or purchasing is better, however I still think people short the merits of the lease. First off you mentioned the upkeep, and the mileage. If you know you are a low mileage driver, and generally take care of a vehicle, then a lease can be a good option. I got a great deal on a lease, zero percent leasing, the residual was 50%, I traded in a clunker and got some money down. So I paid $300 a month for a $32k car for 3 years, 0% interest, 36k miles. When I was done with the lease, I went to the dealer, and talked to them about buying it. If I bought it outright, the best I could get was 3.5% w/ 5 year lease. If I leased, there was no hassle, there was a defined residual value, ($16k, which was less than the $21k Kelly Blue Book had it). So I can now, buy a “used” car, which I was the only owner, get it for $5k less than Kelly Blue Book, and financing was dirt cheap on used cars. I was able to get a loan for 2 years, 1% financing through a local credit union. I did not have to pay any incidentals as I was purchasing the vehicle (I was at 26k miles, and a few door dings, nothing major, so my bill would have been minimal).
So with all this info, what did it cost me? If I purchased this car, outright, it would have cost me $29,252,40 with an opportunity cost of $42,981.37. Since I leased then purchased? It cost me $26,967.12 with an opportunity cost of $39,623.55. So I saved about $2500 bucks if I leased, then purchased and a litte more than $3k in opportunity cost. I Still don’t know why people say leasing is a bad option.
@ Life and my finances – The reason there is a leasing business is because 80% of leases come back in as used cars, which have a higher markup. A 3 year old, used car with 36k miles on it is worth about 66% the original value. Since car dealer has already received 50% of the payment (the cars residual cost is usually 50% the MSRP), then they get 16% of that vehicles value free and clear on resale. Since all the incidentals are paid for by the previous owner (scratches, extra mileage, etc.) the car company makes out like a bandit. See my comment above about who should lease.
@ Bob – This post was about leasing vs. purchasing, not buying versus retaining a vehicle. As long as maintenance is cheap on a car, it is always to keep the old car you have as it is paid for and maintenance is cheaper than the monthly payments of a new one.
2 cents worth.
Every situation is different, for one person leasing could be great idea and for another leasing could be a really bad idea. A couple things to remember about the miles you drive. Just because you are buying or you purchased a car out right that does not mean miles are free. When you go to trade in that vehicle you will find high miles are far from free. Just because the leasing company charges you for miles and excess wear and tear at the end of the lease, that does not mean the excess wear and tear did not happen. When you go to trade in your vehicle you will see the “charge” in the form of lower trade in value.
What was left out of the conversation was that fact that insurance is required by you whether you lease or own. Depending on the state and the agreement, you may have to take out more insurance than you would have taken had you purchased the vehicle yourself, so that may be something to consider.
One question about the example above by Big-D, since you didn’t buy the car up front did you use the dealer’s sticker price of what it would have cost to purchase, or what cars like yours actually sold for. If you used the sticker price or even Kelly Blue book it may have inflated your numbers.
Like most things, you can likely get a good “deal” if you are looking and pay attention. Since I personally keep my cars for a long time and don’t want to worry about mileage, or the kids making a mess in them, I buy them outright. My single brother in law my married sister in law each lease their vehicles. It works for them and what they want.
I recommend buying and preferably buying used. Don’t lease. While I have had a few cars in my life time since college, I have only owned one new car (a 2005 Honda Pilot SUV for the family). I think I only bought the new car because it was in a moment of weakness after I had gone through my 1993 Saab 900 (bought it used in 1995), which I had had for 10 years and a family hand me down Toyota Camry, which had low miles, but was not worth repairing. Nevertheless, using the miser philosophy, I plan on keeping my car for at least 10 years or 200,000 miles, whichever comes last.
Our 2 cars are paid off. We will enjoy $0 payments per month for these 2 cars and re-focus the money saved on investments and savings. We will save close to $800 per month after having paid these 2 cars off. In just 5 years, that is equal to $48,000, not including interest. If we do it for 7 years, that’s a savings of $67,200.
If my choices were buying new versus leasing, it would be a tougher decision, but luckily I can buy used and its an easy decision for me.
If you are going to lease, lease from a car brand you know you’ll buy from again. Typically this will save you from paying excessive wear and tear charges. Most dealerships will overlook nic-nac return fees if you jump into another one of their cars.