The subject of buying or leasing a new car is a very interesting one and something that I, as an automobile salesman for over seventeen years, encountered almost every day. Through my experience, many customers have a preconceived idea of leasing as not desirable, which is based, I feel, on numerous past transactions and the influence of family and friends.
Buying a car for cash or financing a car was the only way to go until Zollie Frank and Armund Schoen established Four Wheels, a long term fleet leasing company in 1941. Leasing was a novelty through the 40s and 50s and wasn’t really a factor until the late 60s and 70s. People were “conditioned” to buying a car, either for cash or financing, because there was no real alternative. Leasing became popular during the 1990s when auto manufacturers offered very low lease payments so that the manufacturers and dealers could move inventory. Over the past twenty to twenty-five years, leasing has become very popular and now accounts for approximately 25% of all new car transactions. But, it is not for everybody. The following is a comprehensive list of the pros and cons of purchasing versus leasing a new car.
Be aware that when I mention purchasing, I am referring primarily to financing through a bank, credit union or manufacturer’s bank.
- Ownership of Car
When you buy a new car you retain ownership a long as you want. When you lease a new car, you don’t own it. You, in essence, are renting the car for a specified period of time, usually twenty-four to thirty-six months. At end of lease, you must turn the car in, unless you decide to buy it.
2. Up-Front Charges
- When purchasing a new car, your up-front costs are the down payment, dealer fees, motor vehicles registration fees and sales tax.
- When leasing, the up-front costs include: first months payment, a down payment ( although not required, a down payment lowers monthly payment), acquisition fees, a refundable security deposit, motor vehicle fees and taxes.
3. Monthly Payments
- When purchasing, your monthly payment is based on the purchase price (less down payment if any). interest, other finance charges, dealer fees, motor vehicle fees and taxes.
- When leasing, your monthly payment is based on the pre-determined depreciation of the vehicle during the lease term, rent charges(similar to interest), dealer fees, motor vehicle fees, and taxes.
4. Early Termination
- When purchasing a new car, you can trade the car in or sell the car at any time. Any positive equity can be used to pay off the car or used toward a down payment towards another car.
- When leasing, you may not(according to the lease agreement) terminate the lease early. Only exception is if lessee passes away or dealer decides to buy out lease – as a trade – towards the next new car purchased or leased.
5. Returning Car
- If you have purchased your car, you can trade it in or sell it at any time.
- If you have leased the car, you typically must turn the car in at end of lease. You sometimes pay a lease termination fee and any other end of lease charges(if they are in contract). You then walk away from the lease.
6. Car’s Future Value
- With a purchase, the car will depreciate in value every year. But, depending upon when you decide to sell or trade it, the car does have a trade value.
- When leasing, the car has no future value because you do not own the car, and, there is no equity in the car. *Exception: If car is traded in and the trade in amount is higher than the lease’s pre-determined buy-out price.(This is not a common scenario)
7. Mileage Factor
- When financing, you can put as many miles as you want on the vehicle. But, the more miles you put on, the less the car is worth in resale value. This is an important factor when trading or selling the car.
- When leasing, the lease ha a pre-determined mileage limit, ranging from 10,000 to 12,000, to 15,000 miles per year. The lessee has the option at lease inception to buy extra miles up front. Each lease contract has a pre-determined excess mileage charge, usually from fifteen cents to twenty-five cents per mile. However, if your over mileage is excessive at end of lease, you do have the option to buy the car at that point.
8. Wear and Tear
- When purchasing, you don’t have to be overly concerned with excessive wear and tear except that, when trading or selling car, excessive wear and tear will lower vehicle’s value.
- When leasing, the lessee is responsible(in most cases) for excessive wear and tear and lease company will bill you for the amount owed. Note: Normal wear and tear is normal wear on tires, minor scratches to exterior and dirt in(and on) interior surfaces. Excessive wear and tear is bald tires, major scratches or dents and rips or cuts in upholstery, door panels, dash board and carpeting.
9. Contract Termination
- When buying, end of loan (after all payments have been made) equates to no additional payments and equity in the vehicle.
- When leasing, at end of lease (which is anywhere from twenty-four to thirty-six months), you can walk away from car, buy or lease another car, or finance the leased car at the pre-determined buy-out price.
10. Vehicle Add-ons
- When financing, you can add on or customize car as long as you are aware that you may void your warranty. I advise not to alter vehicle, in any way, while it is under warranty.
- When leasing, any added on parts must be removed prior to turning car in. Any damage to car caused by the removal of parts will be charged to lessee or lessee must repair the car before turning it in.
In conclusion, purchasing or leasing a car is a very personalized decision based on an individual’s mindset, circumstances and financial considerations.
A good rule of thumb, based on my experience as an auto salesperson, is that if you think you will be driving in excess of 20,000 miles/year, it is usually a good idea to purchase the car. Why? Because, at that amount of miles, the lease prices go up considerably (lower residuals) such that there is a smaller difference between the lease monthly payment and the finance (loan) monthly payment. It does depend on lease residuals and money down and can vary, depending upon lease company and bank rates. Also at 20,000 miles a year, in two years you are out of many bumper-to-bumper warranty periods (based on 36 months or 36,000 miles, whichever comes first). It’s something to think about.
If you follow the above guidelines you will have a clearer understanding of the pros and cons of buying (purchasing) versus leasing. I hope that you find the information helpful in the purchase or lease of your next car.
Enjoy your new car!
Remember for your auto parts, please shop online from Amazon.com, Tirerack.com, and Vividracing.com.