You’ve decided you need a new car, but aren’t sure if you want to go through all the hassle of financing. You wonder if leasing a vehicle might be a better option, but since you’ve never leased before it’s all unmapped territory for you. This makes you unsure of what options you have. This article will focus on the pros and cons of both buying and leasing. When you’re finished reading it you will have a good handle on the options that are available to you and they will be clearer. This will help you make the decision of whether buying or leasing is for you.

Today’s Vehicle Trends

Each year the new vehicles that roll off the assembly lines rise in price. Many families that once owned two cars are now making do with one. The cost of fuel is also skyrocketing and some auto experts feel that everyone will be leasing their vehicle within the next fifteen to twenty years. Car payments will become a fixed monthly expense at this time, just like your house payment or power bill. There will never be a time when you actually won your vehicle outright.

If you’ve never leased a vehicle, you may feel a great deal of concern about leasing. Leases can be intimidating. We’ve all heard horror stories about least buy-outs and the amount owed on a vehicle when the term of lease was over. The language on leases can be confusing and is often complicated. Often, they are written in such a way that they are only beneficial to business owners who use them as a tax deduction. However, lease trends are also changing. Before you disregard leasing a vehicle for personal or family use, you need a full understanding of all of the options available.

The Pros of Buying a Vehicle

It’s obvious that the greatest benefit of buying a vehicle is that after three to five years you own it outright and have no monthly payments until it has to be traded. You can sell the vehicle if you wish and you have no worries about who owns the title. Other benefits include insurance that is more reasonably priced and the freedom to drive it as far as you want without worrying about mileage and other types of penalties or restrictions.

The Cons of Buying

One of the greatest penalties in buying a vehicle is that the monthly car payments are much higher than when you lease. Also, the dealership will ask for a nice sized down payment if you’re buying. This is usually about 5%, but sometimes the down payment is a flat minimum of $1,000. Since you don’t want to accept the minimum down payment, the down payment can end up being a hefty sum, especially in today’s unstable economy.

You may assume that as long as you pay the loan on the vehicle that you will soon have some equity in the car. This is not usually true. When you buy your vehicle, the payments are stretched over a number of years; let’s say five. Within the first two years, depreciation on the vehicle is heavy and you may find that at the end of this time that you still owe almost as much as your vehicle is worth. Another scenario is that you put only the minimum down payment of $1,000 down on the vehicle and finance a large portion of the cost. At the end of the five year financing term, you may find that your vehicle is not worth near as much as you paid for it.

Monthly Payments

Monthly payments on your vehicle are divided into interest and principal. When you first buy your car, all of your payments go to pay on the interest. As you pay down the loan, the interest portion goes down and you begin paying on the principal. In the last few months of the financing agreement, you are paying very little interest and a lot of principal.

While you are paying only interest (within the first two years) your vehicle will depreciate 25% to 40% and you won’t have paid one cent off the principal. You owe as much on your vehicle today as you did the day you drove it off the lot. This means your loss is double. The payments haven’t reduced the principal on the loan, but your car is worth far less than the day you bought it. It’s enough to make your head spin.

The Pros of Leasing

Leasing a vehicle can be beneficial to you in several ways. Often no down payment is necessary on a leased vehicle and if one is required, it’s usually much less than when you buy. There are no fees or taxes that have to be paid before you get delivery of the vehicle as there is when you buy. Monthly payments for leasing are often only half as much as when you buy and you still have a brand new car that you can drive, enjoy and be proud of.

When you lease, what you’re really doing is renting your vehicle for a fixed number of months. During that time, you pay for using it. You do not have to worry about losing money on depreciation. When you lease, you will never find that you’ve paid more for the vehicle than it’s worth.

People often lease a car when they aren’t in a position to buy. Some leasing companies will lease to you if you’re trying to establish your credit, or even when you are trying to re-establish it after a bankruptcy. Leasing companies will often lease high priced vehicles that a bank will not approve a loan for, such as those with a price tag of more than $25,000.

If you own a business, leasing is beneficial to your business as it gives you a tax advantage if the vehicle is used only for business purposes. At the end of your fiscal year, you can write it off as a legitimate expense, plus fuel and maintenance. Be sure to check with our accountant to find out how to take advantage of this option.

Cons of Leasing

One of the drawbacks of leasing is that your car payments are never-ending. If that is something you will have difficulty accepting, then leasing may not be an option for you. When you lease you never own the vehicle, the leasing company does. You just pay for the privilege of using it. However, trends are also changing in this regard. There are a few leasing companies that will allow you to pay off the car in five years. The interest on these types of leases is very high; usually around 25% to 29%. If this type of lease is not for you, you can take a traditional lease. This means when the term of the lease expires that you will either give the vehicle back to the leasing company and lease another, or finance the remaining value of the vehicle. With the first option, you once again have lease payments. With the second, you pay a car payment every month.

Restrictions on Leases

When you lease there are often restrictions on mileage. If you put a lot of miles on a vehicle each year, you will need to negotiate an open-end lease because in most cases the maximum mileage allowed is $15,000. If you put extra miles on the vehicle, you pay a penalty of approximately 15 cents per mile. If you are leasing a luxury car, the penalty can be as much as 25 cents per mile. That means that if you go over the limit by $10,000 miles, you will pay a penalty of between $1500 and $2500 and going over 10,000 miles in a five year term is very easy to do.

Insurance on Leases

Insurance companies usually charge higher premiums for leased vehicles. If you have a clean driving abstract, are an experienced driver, have a permanent residence and are a mature person, the extra fee is very little, or none at all. However, if your driving abstract has accidents and speeding tickets on it or if you are a young driver, the premium will be a lot higher when you lease.

Buyer Beware!

When you lease, you pay for the most desirable years of a vehicle’s life. You pay the difference between the purchase price paid and the salvage price at the end of the lease agreement. When the dealer enters the salvage price on your leasing contract, it affects the amount of your monthly payment. So, if you are leasing a vehicle, choose one that will hold its value well. Avoid all vehicles that will depreciate rapidly.

Less than honest dealership practices are known to occur. Some dealers will try to put depreciation values back onto you by recording a very low residual value for the vehicle at the end of the leasing term. If you feel this is happening, don’t sign the contract.

Also be aware of all fine print and clauses in the contract. Some dealerships will enter steep charges for such things as “excessive wear,” or add an atrocious price on excess mileage. Be sure to read your contract with an eagle eye several times before signing. Don’t let sales personnel pressure you into it before you feel comfortable with the terms and conditions of the lease. If the salesperson says something like, “There was another person in this morning that is very interested in leasing this vehicle,” let it be known that you are going to read the contract thoroughly and that if this other person wants the vehicle that bad, they certainly have the option of signing the lease. This is an old sales scam to get a person to sign immediately.

Options on Leases

Usually you have the option of taking an open-end or closed-end lease. What’s the difference? Let’s find out.

Open-end Leases

With an open-end or equity lease, you have to purchase the vehicle when the leasing term ends for an amount that is predetermined when you sign the leasing contract. If you need a high mileage or business lease, this is probably the lease that will fit your needs.

Closed-end Lease

When you choose a close-end lease, you return the vehicle to the dealership when the leasing term expires. If you owe for wear and tear, damage or mileage, this is when you pay that amount. Consumer and financial experts agree that in most cases, a close-end lease is the most beneficial to the leaser. Why? Because it puts you at less risk when the term of the lease expires.

The Big Decision

Now that you are well aware of all the options for buying and leasing a vehicle, it’s time to make the big decision. The decision should be based on individual needs and personal preferences. If, in the future you’d like to see an end to monthly vehicle payments, your only option is to buy. If you want to eventually own the vehicle, the option is the same. On the other hand, if you’d like to own a sparkling new car every few years and keep expenses to a minimum, taking out a closed-end lease is an excellent choice. It’s all about what’s best for you.