With low monthly payments, car lease offers look very attractive, but how do you tell if leasing is right for you? This guide from Bob Howard Acura can help.
The main difference between leasing and buying
The primary difference between buying and leasing boils down to who owns the vehicle at the end of the repayment period. When you buy a car, it’s yours forever once the loan is paid off. However, at the end of a lease, the finance company owns the car. In effect, you just pay them for the use of it over a fixed period. What you pay is essentially the amount by which the car will depreciate over the lease period—most new cars lose 20 percent to 40 percent of their value over the first couple years—plus interest on the money the finance company has used to buy your car.
There are a host of factors to take into account when weighing up whether to lease or buy; these can be grouped under the headings of Depreciation, Lifestyle, and Financial.
The finance company estimates what the car will be worth at the end of the lease – the residual value—based on its past experience with that particular make and model plus two assumptions about how it will be used: the number of miles driven and the assumption that it will be returned in good condition. If you drive under 12,000 miles a year, park where the car won’t get dinged or scratched, and keep it clean and well-maintained, then you’re a candidate for leasing. On the other hand, aftermarket accessories can severely cut the residual value, so if you’re into personalization or performance add-ons, it may make more sense to buy.
As auto website Edmunds.com notes, leasing lets you “drive a better car for less money each month.” Everyone likes to be behind the wheel of the latest model, but there’s an important benefit besides prestige and satisfaction. Almost all new cars are covered by a three-year warranty—some are even longer—so repair costs are virtually nil. This can be a big peace-of-mind factor for those worried about the risk of large repair bills.
Leasing also makes it easier to change cars. When you want to replace a car you own, you’re faced with negotiating a trade-in deal or selling the car privately. As a lessee, you simply drop off the old model and drive away in something new.
The downside to leasing is that you’re locked into a monthly payment and an annual mileage limit. Over-mileage charges can be steep, so if there’s some uncertainty about how the car will be used—for example, if you might change jobs and have a longer commute—then leasing may not be the best option.
Buying a car means tying up a large lump sum in a depreciating asset. Those who want to do something else with their cash, as well as those lacking a sizeable down payment, will appreciate how leasing minimizes the initial cash outlay. Also, if the vehicle is used for business purposes, there may be some tax benefits from leasing. Talk to a CPA for details.
In summary, the monthly cost of leasing is always less than buying, for the simple reason that you’re only paying for part of the vehicle. But before signing on the dotted line, take a moment to review your individual needs and circumstances and speak with a Bob Howard Acura leasing expert to decide if leasing is right for you.