Should you buy or lease?
You've noticed those ads that are on television all the time that promise the car of your dreams for a low monthly (lease) payment. Who wouldn't like to get that new $20,000 vehicle for only $199 a month rather than the $420 a month that the loan calculator estimates? Wonder how they can do this? Well, it's quite simple. It's called a lease. Rather than purchase the vehicle, you are arranging to drive it for a period of time, typically three to four years, after which you can just walk away. Of course, that means you basically rented that vehicle and you get nothing in return for all that money you paid. Plus, you pay for any damage other than normal wear and tear, and you pay for any extra mileage you put on the vehicle, over and above a state annual amount of miles.
So before you decide to get that new vehicle with those low monthly payments, it's important to consider whether buying or leasing is best for you.
Leasing is a good move if you're someone who wants the very latest model, puts fewer than 12,000 to 15,000 miles a year on your car, and maintains it religiously. With those caveats in place, leasing generally offers lower monthly payments or allows a buyer to get a more expensive car for the same monthly payment they would make in a conventional financing deal.
But you never own the car -- it's the property of the leasing company -- and at the end of the lease you have to give it back and walk away with nothing, trade it in for a new car and a new lease, or buy the car for the remainder of the purchase price, which means a new loan on a used car for a very large sum of money (since you were making very small payments).
Buying a vehicle rather than leasing comes with some obvious advantages. Drive the new vehicle right and take care of it and it can be worth a significant amount when you finish paying for it. After about three years it could be worth more than you owe in case you want to get rid of it.
But if you're like most people, you'll likely extend the financing to at least four or five years (some even allow six years), meaning you'll be making payments on a car that at the end may well have started to deteriorate.
To decide which option is best for you, before you begin shopping for a specific vehicle, honestly answer these questions:
- Do you drive more than 12,000 to 15,000 miles a year? Remember, be honest. If you drive more than that, leasing isn't for you because you'll end up paying hundreds, if not thousands, of dollars, in extra mileage fees.
- Do you mind always having a car payment? If you don't mind always having a car payment, leasing may be right for you. It will allow you to get a new car every three or four years without making a substantial down payment.
- Do you maintain your vehicles? Do you typically avoid minor damage (dents and dings)? If you don't, then buy that vehilce, don't lease, because lease contracts require that you return the vehicle in good shape, fully maintained.
- Is it possible you would ever modify your vehicle? Then buy, don't lease, because under a lease, you don't own the vehicle. Any changes you make could affect its value and the leasing company will want compensation.
- Do you anticipate any lifestyle changes? If you foresee marriage or a new baby, for example, during the term of the lease, then buy instead. If you lease that two-seater sports car and two years from now need a minivan, you'll have to pay plenty to cancel the lease. If you buy, you may still owe more than the car is worth two years into the loan, but you'll likely lose less than you would pay under a lease termination.
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Arrange for a lease