Money Management - November 2000

Should You Lease or Buy Your New Car

For more and more new car seekers, leasing is the answer to the "lease or buy" dilemma. But that doesn’t mean it’s the best choice. You need to take money, convenience, and lifestyle issues into consideration before you decide whether to lease or buy a vehicle.

Consider Financial and Convenience Issues

When you finance the purchase of a new car, you typically make a down payment and borrow the rest. As long as you make all the payments, you eventually will own the car. When you lease a car, you finance only the portion of the car’s value you are using, plus a finance charge. Since leasing payments don’t need to cover 100 percent of the car’s costs, monthly payments are generally lower than if you were to buy the same car. In fact, leasing’s greatest appeal may be upscaling — you can drive off in a more expensive car for less than its purchase price. On the downside, at the end of the lease duration, you do not own the car. For some people, that’s good news, since it means they don’t have to deal with selling the car or trading it in. When the lease ends and you want another new vehicle, you turn in the keys, sign a new lease, and drive off.

Getting the Best Deal

Whether you lease or buy a new car, you are entering into a substantial financial obligation, so you want to be sure that it’s a fair transaction. When you lease, many dealers will focus on the monthly payment instead of the total purchase price of the vehicle. To get the best deal, you should shop for a lease in the same way you would if you were buying the car. The most important factor is to consider the car’s sticker price and negotiate down from there. Whether you decide to lease or buy, the lower the original price, the lower your monthly payment.

Evaluating Lifestyle Aspects

In addition to the financial and convenience issues of buying or leasing a new car, there are lifestyle issues you need to consider. For example, how many miles do you drive each year? If your work or personal life demands that you clock lots of mileage, you’re probably better off buying. Leases typically limit the number of miles you can drive to 12,000 or 15,000 miles a year. Mileage above the contracted amount can cost you 10 to 15 cents a mile. If you expect to exceed the standard mileage limit, try to negotiate a higher mileage allowance at the time you sign the lease. The cost per mile can be substantially less when it is built into the lease up-front.

Another consideration is how you treat your vehicle. Lease agreements usually include penalties for excessive wear and tear. If you anticipate stains on the seats and dings on the doors, you may want to think twice about leasing. In any case, find out what is included under acceptable wear and tear and what it may cost you when the car is turned in.

When it comes to maintenance and upkeep, leasing has some advantages. If you lease a new car every two or three years, it’s likely that the vehicle will be under warranty, so you shouldn’t have to pay for costly repairs. Keep in mind that you will still be responsible for routine maintenance, such as oil changes, tire rotation, and replacing the brakes. It’s a good idea to keep careful records to prove required services were completed.

Keep in mind that if, for any reason, you need to cancel the lease before the term is over, it could cost you thousands of dollars. That’s why it’s important to consider possible changes in your lifestyle before deciding between leasing and buying and before settling on the type of vehicle that you lease. For example, if you’re planning to have a family during the term of the lease, you may want to lease a minivan instead of a smaller car. By contrast, one of the advantages of financing a car is that you have the flexibility to sell or trade it in whenever you want, as long as you pay off the loan.

Business Use Of Car

The decision to buy or lease becomes even more complicated if you’re using the car for business. You may want to consult with a CPA who can determine whether, tax-wise and otherwise, leasing or buying makes more sense for your particular situation.