Lease or Buy?

Should you lease or buy a car? To figure this out, you might want to consider these questions: Do I want to drive a brand-new vehicle every few years and have lower maintenance costs? Or, do I like owning my own vehicle, having the freedom to sell my car at any time, and putting as many miles on it as I choose?

Lease or Buy: Based on Depreciation

The concept of leasing is based on the depreciation value of the car (that is, the difference between the retail price of the vehicle and its resale value later on). All vehicles depreciate, whether you buy the car or lease it. When you buy, you agree to pay the full, upfront retail price of the car. Although the car will depreciate in value over time, once it's paid off, it's your property to do with as you wish. When you lease a car, you agree to pay the amount the car will depreciate during that period of time. In other words, you pay only for the amount of car you'll be using. At the end of the lease agreement period, you return the car to the dealer.

Leasing May Offer Low Monthly Rates

There can be many cost benefits to leasing. For example, leasing may require little or no down payment and no upfront sales taxes. Depending on your state, you may have to pay sales tax only on your monthly payments. Because you're paying only the depreciation costs of the leased vehicle, monthly payments can be as little as half of what you'd spend paying for a car loan, an attractive feature for the budget-conscious.

Lease to Own

If you choose an open-ended lease, you might be able to defer the full purchase price of the car for a few years by making the lower monthly payments for a time, then purchasing the car outright at the end of the lease period for a predetermined price. On the other hand, a closed-end lease lets you return the car to the dealer at the end of the lease period.

Cost Considerations When Buying

Buying a car can require initially higher costs but might result in savings over the long term. When buying a car, you will probably need to obtain a car loan, which requires a good credit rating, negotiate an interest rate, make a down payment, and pay sales tax. On the other hand, car insurance payments are usually lower when you purchase a car. One of the biggest advantages to buying your car is that you own it outright. Car loans generally last for three to five years, depending on the price of the car and the amount you decide to pay each month. Once you've paid off the loan, you own the car free and clear. For many people, it's a great feeling to lessen their financial load each month.

Choices with Ownership

If you own your car, you have many choices. You can put as many miles on it as you choose without any restrictions. You can sell it and recoup some of the money you've put into it. Or you can "drive it into the ground" before you're ready to purchase another vehicle.