Should You Buy or Lease?

There is no simple correct answer to the lease/buy question, just as there is no simple answer to the question: should I wear a white sweater while eating spaghetti Bolognese? Making the right decision for yourself is a matter of your personal desires, values, current financial status and your ability to avoid making a mess of things.

Auto leasing has been around for decades and once upon a time offered small business owners significant tax advantages. Those days are long gone, but leasing has caught fire in the last few years, spurred by manufacturers who use special lease deals to promote their vehicles. Industry experts estimate that next year leasing will represent as much as 35% of the new-car market. Among the luxury brands it's often as high as 80%.

Certainly with this kind of acceptance in the marketplace, leasing must offer the consumer some advantages. Indeed it does, although you must remember that hula hoops and mood rings, among other essentially worthless items, have also enjoyed wide consumer acceptance over the years. Like chili pepper, leasing is neither inherently good nor bad; it simply depends upon how it and your system react together.

One of the key advantages of leasing is you only need a comparatively small amount of cash to initiate a lease. Let's say you don't have much money in the bank and no trade-in vehicle, but you do have reasonably good credit. You can walk into your local dealer, sign on the dotted line for a lease and drive out with a luxurious leather-lined Lithemobile 200LX with very little difficulty. If, on the other hand, you want to buy that self-same Lithemobile 200LX you will have a very difficult time.

Another advantage of leasing: you can structure the lease term to match your trading cycle. If you normally purchase a new car every two years, you might be better off with a two-year lease. (You might also ask yourself why you feel the need for a new car so often when the typical car is now under warranty for at least three years. In other words, if the manufacturer thinks it's good for at least three years, why don't you?)

Leasing also works to the advantage of those who don't know what to do with their current vehicle when the time comes to acquire a new one. You don't have to weigh the advantages of trading it in at a dealership versus selling it yourself, and you don't have to go through the selling-it-yourself hassles of running want ads and meeting with prospective buyers. You don't even have to decide when to do all this. It's spelled out in the lease contract. Most often you have two simple options: 1. you take the car back to the dealer and wave bye-bye or 2. you pay the dealer (or finance company) the amount specified in the lease agreement at the time the lease was established and you keep the car.

One of the biggest reasons for the popularity of leasing is the fact that for the same monthly payment, you can lease a significantly more expensive vehicle than you can buy. Even if you have a good credit rating, most banks and other financial institutions will expect you to put place a down payment of 10%-20% on a car. This is to protect them in case you go berserk, start keeping company with the lead singer in a grunge band and refuse to make the payments. If they are forced to repossess the car they have a 10%-20% head start on recovering their money. What this means is that to qualify for a car loan most people have to have $2,000 to $5,000 minimum in cash or in equity in their current vehicle.

That puts a lot of people out of the car-buying picture. But wait a minute! Now there's the possibility of leasing. You might not have much money to put down, but you might have a good credit history that gives the financial institutions the warm, fuzzy feeling you’ll make the monthly payments.

When you lease, you'll have the use of the car over a specified period of time, but, according to the lease terms, you must maintain the car, insure it and limit the miles you put on it. At the conclusion of the lease period, the financial institution will get back a reasonably well-maintained, late-model, low-mileage vehicle. That’s what we call a tangible asset. Meanwhile, you’ll have to initiate another lease or somehow pony up enough scratch to buy a car.

The Key Purchase Advantage

You can look at the lease experience as a positive one. After all, it allows many people to drive vehicles they otherwise could not have afforded for a period of time. What's more, they didn't have any hassles trying to sell the cars, trucks or sport-utility vehicles when the term was up. And they didn't have to go into his pocket to pay for major repairs, since, through the first three years of a lease, the vehicle was under manufacturer’s warranty.

Compared to the numerous advantages of leasing, there is only one key advantage to purchasing your next vehicle–as you make payments, you build equity in a real asset. For many people, however, this one advantage of buying far outweighs all the advantages of leasing.

Look at it this way. Would you rather lease or purchase your home? Sure, by owning the home you have to put up with all the hassles that are involved–maintenance, upkeep, repairs–but you're also building equity in a real asset for yourself and your family. When you purchase the vehicle you, not the financial institution, take the risk on the value of the vehicle at the conclusion of the financing term, and for this risk you are very often rewarded. Your payments will cease and you will have a real asset, a real asset you can continue to drive for months, if not years, payment-free. And studies show that driving your vehicle until it essentially has no re-sale value is the most cost-effective way to have auto transportation.

In most instances, you are better off purchasing a car than leasing it if you can afford to make the down payment and the higher monthly payments when compared to leasing. Of course, lease payments should be lower than the monthly payment on a purchase since in leasing you are only obtaining a part of the vehicle’s life, not the vehicle itself. The important difference that favors purchase -- you take a risk on the future worth of an asset, and you most often gain a reward for taking that risk.

That said, there are still a few instances when it's better to lease than buy. Among them are:
  • You simply can't afford to purchase your dream vehicle but you're confident you can make the lease payments through the end of the lease term. (Always plan on staying with a lease through the end of its term because it is very difficult and expensive to terminate a lease before its completion.)

  • You feel the quality and dependability of the vehicle is a bit "iffy," but you'd still love to have it. Leasing allows you to try it out for a couple of years. If you love it at the end of the term you can buy it; if you hate it you just drop it off and say good-bye.

  • You need to have a bright, shiny new vehicle every two or three years. (It's okay to admit you're shallow.)

  • The manufacturer is making a lease offer that's so financially compelling that you can't afford to pass it up. Many manufacturers now put models on sale, not by lowering the price, but by offering special lease deals.

  • You can't stand the hassle and the bargaining involved in selling your old car and buying a new one.

We wish it were simpler to decide whether to buy or lease, but a car acquisition is one of the most complicated financial deals most of us will make. Since each of our financial circumstances isn't the same, neither is the right answer to this important question. But the information we've provided should help you determine where you fit on the lease-buy continuum.

-- Jack R. Nerad

Nerad is the author of The Complete Idiot’s Guide to Buying or Leasing a Car, which is available at retail bookstores nationwide as well as at Amazon, Barnes and Noble and other online outlets.
by Jack R. Nerad for Driving Today