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Buying Versus Leasing a Car

By on June 28, 2015
Categories: FINANCIAL PLANNING, TIPS & TRICKS

If you will be searching for a new car soon, you’ll need to answer this question:

Should I lease or buy a vehicle?

There are advantages and disadvantages to both approaches. Here is a run down of things you should know:

Down payment.

A popular reason why consumers decide to lease is because they can drive off with a new car with a much lower down payment. The down payment for leased cars can range from $0 to several thousand dollars. With a lease, you may be able to select a car that would be too expensive if you bought it out right.

When buying a car, many dealers will require a 10% to 20% down payment. Some buyers will have to stretch out the length of the loan to five or even seven years to make the monthly payments affordable.

Payments.

The monthly payments will almost always be higher if you buy rather than lease a car. When you purchase a car, your monthly payments cover the purchase price of the car.

In contrast, the lease payments will usually be lower because you are only paying for the vehicle’s depreciation during the lease term, along with fees, taxes and interest charges.

It can be quite challenging to understand if proposed lease payments are acceptable. The financial workings of a lease are so complicated that consumers often don’t realize that the costs of a lease are higher.

Edmunds.com has a tool on its website that will allow you to calculate your own lease payments.

Mileage.

When you buy a car, you can drive it as much as you want. When leasing a car, however, you need to keep your eye on your mileage. Usually a lease limits your mileage to 12,000 to 15,000 a year and some leases have mileage caps as low as 9,000. You’ll get accessed a penalty if you exceed the mileage limit. You’ll pay a fee per excess mile when you turn your car in at the end of the lease period. This extra cost can be very expensive.

Wear and tear.

If you own a vehicle, you don’t have to worry if your kids track their muddy shoes in the backseat or the dog chews up the upholstery. The lender won’t care what your car looks like. With a lease, you’ll have to pay extra charges if you return the car with excessive wear and tear.

Customizing the car.

If you want to repaint your car, add racing stripes, install fancy hubcaps, customize the upholstery or make other major changes, you can. That’s not going to be allowed if you lease a car although you may be able to make minor alterations that can be reversed before returning the car

Equity.

A huge benefit to buying a car is that you own it outright after you make your last payment. At the end of a lease, you’ll have to lease another car or finance a purchase.

Bottom Line:

For most people, it makes financial sense to buy a car rather than lease. This is especially true if you plan to drive the vehicle a lot.

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