Lease or Buy in the Crazy Zone

Chrysler is in bankruptcy. General Motors might be headed to the same place. The Saab, Pontiac, Hummer and Saturn brands have been cast adrift. Even sales at Toyota, a former bastion of strength, are down by more than 30 percent this year. All in all it is not a comforting time to endeavor to acquire a car. But the fact is, despite all this tumult, it might actually be one of the best times ever to do just that. The deals are great, the incentives are greater and many dealers would eschew their white belts and shoes just to make a deal with you. So feel free to venture out into the marketplace.

As you wade into this buyers’ market, one question that remains perennial is whether you should buy or lease. Many people think that leasing a vehicle gives them more flexibility than buying a car. At first glance it seems like a lease is analogous to dating, while buying might be analogous to marriage. But they are wrong. In actuality, buying a car gives you more flexibility because you are not limited to a specified number of miles you can drive; you can modify the car at will, and most important of all, you can sell it whenever you want to -- even if you still owe money on your car loan. In contrast, if you lease, you are held to a certain number of miles driven each year or you face a rather stiff per-mile penalty even if the company from which you acquired the car goes out of business. When you lease, you are not allowed to modify the car by adding things like bigger wheels and tires unless you return the car to its original condition before you turn it in. And even if the car’s manufacturer goes belly-up, getting out of a lease can be very difficult.

With all this said, this is actually a pretty good time to consider leasing. Right now, some lease deals are mind-bogglingly good because car companies are desperate to unload vehicle inventory. Leasing also largely removes you from the unprecedented iffiness surrounding used-car values as we move forward in time. In addition, if you like replacing your vehicle with a new one every two or three years, you are certain you will drive your vehicle fewer than 12,000 miles a year, and you find it very unlikely that you would want to switch to a different vehicle before the two or three year lease term is up, then you are a logical candidate to lease a vehicle. So feel free to lease, even if you have questions about the future health of the manufacturer that built your car. 

One thing you should keep in mind, however, is that if you lease, you will build no value in your car. Instead, all payments you make -- both the initial payment and the monthly payments -- are simply expenses. They represent money paid out that you will never see again. If on the other hand, you purchase a vehicle, your down payment and a portion of the monthly payments you make will subsequently buy you “equity,” or ownership in the vehicle. If you make all your payments over the course of the car loan, you will then own a tangible asset -- your car. These days, the future value of any car is a bit cloudy, but you can bet owning a car is better than not owning one. 

A good financial strategy is to “buy and hold.” In other words, choose a vehicle you think you can live with over time (not a bad way to choose a spouse either) and then commit yourself to maintaining that car, paying off the loan and driving it several more years -- monthly payment-free. In fact, if more people had done that with their houses and cars in the past few years, we would probably not be in the financial predicament we now find ourselves.