Lease or purchase, whats better for me?
Everything you need to know about leasing or financing a vehicle.
Lease or purchase, whats better for me?
- What Does it Mean to Lease a Car?
- Buying Your Lease
- The Math
- When To Lease
- When To Buy
- 5 Mistakes When Signing Your Lease
After you’ve made the decision to get a new car, you now have the option to pay in full, lease the car, or finance it through an institution.
This article will provide you with everything you need to make the best decision whether to lease or buy your car.
What Does it Mean to Lease a Car?
Leasing a vehicle is a flexible method of vehicle ownership. Unlike the typical car loan where you pay the entire price of the vehicle, leasing a car only requires you to pay for the portion of the vehicle you use, including financing costs.
To lease a car, you simply make a small down payment, less than the typical 20% of a car’s value you’d pay to buy, followed by monthly payments for the term of the lease. When the term expires, you return the car.
“Probably the main advantage to leasing is a lower payment,” says Jerry Love, a member of the National CPA Financial Literacy Commission. “If you plan to keep the car only a few years — say three years max — then leasing allows you a smaller payment, and you don’t have to worry about the trade-in value.”
At the end of the lease you may, depending on your contract, have an opportunity to purchase the vehicle. If you would rather keep leasing, here’s what to expect.
The vehicle you leased will be checked for:
- The number of miles you have driven
- The interior and exterior of the vehicle
- A determination on the wear and tear inflicted on the vehicle
- The timing of your return, whether it’s early or on time with the contract
- A deduction based on the residual value of the vehicle
All of these factors combined will determine if you need to pay the dealership and additional fees. At the beginning of the lease you make an agreement to keep the car in good condition, and to not exceed the agreed upon mileage.
Residual value describes the future value of a good in terms of absolute value in monetary terms and it is sometimes abbreviated into a percentage of the initial price when the item was new. In effect, you only pay the “value” of the car that you use. You then get a return based on the value of the car that remains after use.
Buying Your Lease
At the end of your lease you may be conflicted about whether or not to actually buy the car you have been leasing. Let’s say you lease car that you end up really liking. You’ve driven it for years and you no longer feel like trading it in for something new.
Buying your leased car is called a buyout and it works just like any other purchase. You simply need to provide cash or get a loan. Once you make the payment, you simply get to continue driving the car no questions asked.
There are a lot of things to consider before making a buyout, here are some things to consider when making a determination:
If the residual value is low, you can buy the car for less than it's worth at lease end. Leasing companies have to resell their returned cars either directly to a dealer or through an auction. Often they will negotiate a buyout price that's more favorable to you to avoid that hassle and expense.
By the end of your term you may have accrued significant penalties. Driving over miles, excessive wear, and a collection of dings and dents can result in a hefty penalty. Depending on the remaining value of the vehicle vs your remaining penalty balance, it may be wise to simply buyout.
Consider all options before making a purchase under these circumstance. It may hurt to pay close to the value of the lease in penalties, but you don’t want to end up with a car you don’t want long term. However, if you enjoy the vehicle, this option could be a no brainer.
Even without heavy penalties on your vehicle, it may still be worthwhile to go through with the buyout. Consider the make and model of your car. Perhaps it didn’t go down in value as you predicted. Maybe it is more durable and comfortable to drive than other car in it’s price range.
Either way you will need to either make a buyout, buy another car, or lease another car. Considering the complexity of calculating the value of a vehicle, it is definitely worth while to consult a professional to help you break down the math. Here is an example of what you can expect.
Let’s get into the nitty gritty. Let’s start with a Toyota Corolla priced at $26,000. We’ll look into an example dealing with a 3-year loan and a 3-year leaser. Assume the Corolla will depreciate up to about 50% of original value, or $13,000. The finance rate and lean for this example will be 5.0% APR. Finally, let’s assume no down payment was made.
First, let’s look at what we can expect from the payments on our loan. Pull up an Auto Lease Calculator and plug in the numbers above into a 3-year term. Our payments will be $779.24 per month and the cost of financing comes to $2052.76. All together our cost will be $28,052.
Now we can see how much money we can recover from our 28k cost. Wether we trade or sell the vehicle, we can expect to make over 50% of the cost back. After 3 years of use, the depreciations compounded with wear, tear, and financing, we can still expect a considerable return. Only 3 years of consistent, healthy, use won’t bring the value down of the lease too much. In our example, our recouped cost is $15,052
Now let’s focus on the lease. We are doing the same calculations as we did on the loan but now we have to factor in the average $600 acquisition fee and the $350 disposition fee. The wear and tear to the vehicle applies here as well.
Let’s reference the lease calculator again to finalize our work. Our monthly cost now comes to $460.13. After 36 months our total costs will be $16,915 after adding the disposition cost. Additionally, financing comes out to $2,993
At this point in our work, we now need to consider the “money factor.” The money factor replaces the concept of an interest rate in terms of our loan. Take the initial interest rate and divide it by 2400. This brings a 5.0% APR to a money factor of .0021. And finally, add on the residual value of the care and we will have a clear idea of what our final cost will be.
Finally, we must consider sales tax. Sales tax is paid on purchased vehicles and leased vehicles. This tax will vary based on state. We’ll assume a local tax rate of 6.0%. For a $26,000 vehicle the tax for a purchase is $26,000 x .06 = $1560. For a lease, the tax is applied to each monthly payment ($460.13 in our example). So, $460.13 x .06 x 36 months = $993
When To Lease
Having to decide between leasing and buying your vehicle is difficulty. This article will take you through all the situations in which leasing will be the better option. We’ll focus on when to buy a vehicle in our next article.
The basics of a lease is simply making monthly payments to ‘borrow’ a vehicle from a dealership. Part of the lease agreement will be that you will be responsible for wear and tear and cosmetic degradation during the time you were using it.
Even if you know you want to own a vehicle, it’s still a smart choice to lease the car first. No matter how much you read about a vehicle, you may not actually like it after a few months or a years of constant use.
Everybody has a different experience with their cars. Some cars do better in a city setting and others do better with highway driving. You may think you want a more spacious vehicle but end up not needing it after all. So by leasing, you reduce the risk owning a car you end up not liking.
But this is not the main reason to lease. Leasing is great when you don’t want to drop a bunch of money up front. Considering how quickly vehicles lose value, purchasing a one outright is not a great idea. Leasing is a great way to save money and drive a nice car at the same time.
However, make sure you know how many miles on average you drive per year. A big part of the lease agreement is the mileage restrictions. If you drive more than the average commuter a lease agreement might not be right for you. Especially if you are prone to road trips or have an unusually long commute to and from work.
Leases are designed to fit within the parameters of the average driver. So if you fall into this category you don’t have much to worry about. Simply take the car to the dealer for consistent maintenance and drive safe. If you folly the basics you won’t have to deal with any penalties at the end of the lease agreement.
Maintenance is another reason why leasing a car is great. You never know when some kind of unexpected problem will arise with your vehicle. Having a lease guarantees you will ever have to deal with the high cost of repairs. You are just borrowing the car from the dealer, you are not responsible for any repairs that is may need.
Lemons are a big problem in the car buying industry. A lemon is a car that has malfunctions that are unpredictable and unusual. This is usually the result of some kind of oversight in the design process. There are many great cars out there that are considered to be lemons. The last thing you want is to purchase a vehicle that requires an exorbitant amount of repair costs.
Another unique per to leasing a car is the ability to have a high quality vehicle without spending a ton of money. Let’s say you work in an industry where you are seen in your vehicle consistently. It will help your image if you are seen driving a nice car, regardless of whether it's a lease or not.
It may seem superficial but people, especially potential clients and business partners, will judge you based on these kinds of things. Having a great car that you like will be noticed by others, and you don’t even have to take the large risk of buying the vehicle outright.
THe ability to eventually buy the vehicle is a great reason to lease as well. Let’s say you lease a car our of your price range, but after 2-3 years your career improves and you’re making more money. Now you can get the car that you love and it isn’t as much a financial risk as it was before. And since you have already leased it, going through with the buyout will ultimately be cheaper overall.
The benefit of buying comes when you know you love the vehicle you are about to purchase. For those who enjoy working and upgrading their vehicle, and intend to keep it in the family, buying is the better choice.
At the end of the day you need to weigh the pros and cons of leasing for yourself. In short, here are the circumstances in which you should lease your car:
- You want to avoid spending a lump sum of cash
- You want to save money on maintenance costs
- You want to experience the vehicle before buying
- You want the option to lease another car in 2-3 years
- You have an average commute to and from work
- You want a more expensive vehicle for business purposes
- You may be in a better position to buy in the future
Deciding between leasing and purchasing can be difficult. Feel free to reach out to us anytime for a personal consultation. Visit us at carvoy.com
When To Buy
Perhaps you are considering buying a car instead of leasing. Leasing isn’t always the best option so let’s discuss all the best reasons to buy instead of leasing.
Think about how you’ll be using your vehicle day to day. Is it essential that you own the it in order to get the most value from it? Are you prepared to take on all long term maintenance costs? Depending on what you need, here are the essentials that would require a purchase rather than a lease.
Some people just know the car they want. If you are one of these people, then you know there is no other option other than the car you have in mind. But even in this situation, leasing before you buy may be a better choice.
Leasing is a great way to get serious experience driving a vehicle before buying. Even if you have a dream car in mind, after driving it to and from work for 2-3 years, you may change your mind. However, if you know for sure you want to own a particular vehicle, then buying is the right choice for you.
Buying a car gives you full rein to make any changes you see fit. One of the great joys of car ownership is getting your hands dirty. Working on a vehicle is one of the great zen spaces for the mechanically minded.
When you own, you don’t have to worry about sending the car back to the dealer to explain why the car now has 200 more horsepower than when the lease started. This alone is a good reason to buy. Knowing that you want to work on your own vehicle is a great reason to buy instead of leasing.
A lease agreement will prevent you from driving racking up too many miles. However, for the average driver, the limits on miles driven per year is acceptable. Most drivers don’t have to worry about exceeding the their limit.
Here’s where the benefit of buying comes in. If you know you’re going take a couple road trips during the year, you may want to consider buying. Accruing mileage penalties at the end of your lease will offset the benefits of leasing in the first place.
Having the option to sell your vehicle down the road is also an attractive perk to buying. Despite the depreciation of the car’s value over time. A well maintained vehicle, with some upgrades, may still be able to provide a decent return.
You will never regain the complete value of the car. So any gains made from maintaining and improving your vehicle will always be a recoup on losses. For many, keeping a car and selling it can be a cathartic moment. There’s something special about letting go of your car after years of use to it’s next driver.
Think about your long term relationship with your vehicle if you are considering buying. Are you the type of person who would take pride in the process of ownership? For some buyers, this reasoni alone is good enough to buy.
Passing your vehicle off to your children can be a great opportunity for the buyer. Instead of having to buy a new car for a young driver, you can simply let them use a car that is already lost its value. Instead of selling, your child may appreciate getting their own vehicle without you having to break the bank.
A well maintained vehicle can last a long time in your family. A buyer who loves cars will appreciate the tradition built around maintaining and upgrading it. If this sounds great to you, you are probably a better candidate for buying rather than leasing.
Nobody can make the decision but you. You have to be the one who ultimately weighs all the pros and cons. There is no right answer to leasing or buying, it all comes down to the customer’s needs.
However, the average driver just needs a decent vehicle to get them from point A to point B. To ensure their ability to get the most bang for their buck, especially in terms of safety, a lease is usually the right answer.
Reducing liability to repair the vehicle and getting extra safety features because of money saved are two great reasons to lease. Plus, if you end up not liking the vehicle after a few years you can easily get a new one, without the hassle of selling.
If you are still unsure leasing vs. buying, feel free to reach out to us here.
5 Mistakes When Signing Your Lease
Leasing is becoming more and more popular as the price of buying a car increase. On average, cars cost $32,500 according to USA Today. Now the buyer is stuck with a high monthly payment after spending $5,000 on the upfront deposit.
Leasing, on average, leads to lower monthly payments and does not require a down payment. However, there are a few things that can cause a lease to end up costing you more down the road.
To protect our readers from this kind of mistake, we got together the 5 biggest mistakes people make when signing their lease.
When you first go into a dealership to get your lease, they may offer you some lower monthly rates. In order to earn this lower rates you need to pay some upfront cost.
Car dealers advertise low monthly lease payments on new vehicles, but you’d probably have to pay several thousand dollars upfront to get that payment. That money covers a portion of the lease in advance.
To many this seems like a great idea. Put up some upfront cash and enjoy lower payments for the duration of the lease. What’s not being considered here is the chance of wrecking the car or it getting stolen early in the lease. This would mean you paid much more than you would have if you didn’t put anything down initially.
Generally, it’s recommended that you don’t put down more than $2,000 upfront. Many however recommend not putting up anything at all. There is no mathematical advantage to paying more upfront, so there’s no need to take the additional risk.
Instead of paying a thousands of dollars upfront, put that money in an interest generating account. You’ll earn money over the course of the lease instead of giving it to the dealership.
At the end of your lease you have the option to buy the vehicle. Its cost is based on it’s residual value. So if the residual value of the car is $10,000, then you pay that amount to the dealership and you own your car.
But, like we discussed above, if something happens to the vehicle you may end up owing the dealership money. In the unfortunate situation of an accident, the insurance company and the dealership may have a disagreement on the value of the vehicle.
GAP insurance makes sure that, in the case of a discrepancy, you don’t get stuck with paying the difference. The appropriately named GAP insurance pays the gap between the insurance company’s value of the car and the dealership’s value of the car.
The end of a lease agreement is when you have to pay any fees incurred by violations of the lease agreement. When drivers underestimate how many miles they will drive under their lease the fees they have to pay almost outweigh the benefit of leasing.
Lease agreements with low monthly payments usually equate to tight mileage agreements. It makes sense because if you don’t drive your lease a lot then it's fair for the dealership to charge you less.
Typically annual mileage limits range between 15,000 and 10,000 miles. Before you sign a lease, check your average mileage. What’s your annual range? If you fall somewhere in this range then you don’t have to worry about any mileage penalties.
The key here is figuring out what your annual mileage is beforehand. This can be difficult if you haven’t already started keeping track. If you happen to know your what the exact mileage was of your vehicle once you started driving, some mathematics should be able to get you the right number.
Even for those who drive more than average, a lease agreement can still be a viable option. You can pay higher monthly payments in exchange for more flexibility with your mileage cap. This is a good strategy to get the benefits of a lease agreement while still being able to drive without worry.
Rule of thumb is to always maintain your vehicle as best as possible. This is the best way to ensure no problems with your dealership at lease end. But, of course, it doesn’t always work out this way.
Normal wear and tear on your lease is acceptable by most dealerships and lease agreements. However there are limits here as well. Large scratches, dents, and other obvious damage to the car will be charged to you by the end of the lease.
Every lease agreement is different. They may have some specific dimensions that apply to the size of scratches and dents. Be aware of these dimensions because they can mean the difference between a hefty fine and nothing at all.
It’s always good to be extra cautious when driving a lease because at the end of the day it’s still the dealership’s vehicle. Do your best to buff out or repaint the dents and scratches you acquire during normal wear and tear. This upfront investment in maintenance can save you big time at lease end.
The longer you lease your vehicle the more risk you take on. It’s just a matter of statistics that at some point, the longer you drive, the higher likelihood there is for an accident, above average wear and tear, and mileage violations.
The end of the vehicles warranty may also be a factor here. If you drive your lease for over 40,000 miles in total, there’s a very good chance you will exceed the warranty.
Once this happens you will be responsible for any repair/maintenance costs. This can sour a good lease deal very quickly. You can end up investing in a vehicle you don’t even own.
The longer you drive your lease the more ownership becomes a more attractive idea. So if you know you don’t want to own, leasing for too long may put in a position where it would be foolish to not buy.
All these factors are major considerations everybody should make before signing a lease. Being smart about your lease reduces risk and saves you a lot of money in the long run.
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