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Buying a vehicle with a loan is pretty straightforward. You borrow money from a bank and make monthly payments for a certain amount of months. Part of each payment is principal and interest. As you repay you build equity until at the end of the loan-the car is all yours. You can keep it as long as you like. Leasing a vehicle has become a mainstream alternative to buying, but is it right for you?
The Benefits of Leasing
Monthly payments are usually lower because you're not paying back any principal. Instead, you're just borrowing and repaying the amount that the car depreciates in the time you have it, plus a rental charge. Here are the major advantages of leasing:
- You drive the car during its most trouble-free years.
- You're always driving a late-model vehicle, and one that's usually covered by the manufacturer's warranty.
- You may drive a higher-priced vehicle than you might otherwise not be able to afford.
- You don't have to worry about the vehicles trade-in value or go through the hassle of selling it when you want a different vehicle.
- At the end you have first option to purchase the vehicle for a pre-set amount or you may just drop off the car at the dealer.
The Downside of Leasing
As attractive as a lease may appear it may not be for you. If you lease one car after another, monthly payments go on forever. By contrast, the longer you keep a vehicle after a loan is paid off, the more value you get out of it. Over the long term, the cheapest way to drive is to buy a car and keep it until the wheels fall off.
- Lease contracts specify a limited number of miles. If you go over that limit, you'll have to pay an excess mileage penalty. Unfortunately, you don't get a credit for unused miles.
- If you don't turn in the vehicle with normal wear and tear you will pay excess wear-and-tear charges when you turn it in.
- If you need to get out of a lease before it expires, you may pay a penalty.
- Consider these pros and cons carefully. If a lease's limitations put you off, consider buying new car or a well-maintained used car such as a "certified pre-owned" vehicle from a franchised dealer, or getting a longer loan term.
Does It Make Sense to Lease?
Do you want six or seven year loan or a standard three-year lease. At the point the lease ends, the bank borrower still has three years of payments to go, but the lessee has to look for another car-or perhaps take the lease's buyout offer.
An automaker may also kick in extra rebates on a lease deal, ones not available to a loan customer. In addition, the interest rate on a lease may be different from the interest rate offered on a loan. Make a comparison.
Opting for a longer-term loan of six to seven years may bring your monthly payment close to that of a lease.
Longer loans make it easy to get "upside down"-where you owe more than the vehicle is worth-and stay that way for a long time. If you need to get rid of the car early on, or if it's destroyed or stolen, the trade-in, resale, or insurance value is likely to be less than you still owe. Gap Insurance is a good option.
If your goal is to have both low monthly payments and drive a new vehicle every few years with little hassle, then leasing is a good option. Be sure, however, that you can live with mileage and wear and tear limitations.
According to oil Baron Paul Getty, "If it appreciates, buy it. If it depreciates, lease it."
