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Should I Lease or Buy My New Car?
Carmarkets guide to deciding which is right for you
Did you know that approximately one third of new vehicles leave the showroom under a lease? Did you know that 58 percent of luxury automobiles are leased? Do you even really know what the heck it means to lease a car? Leasing offers certain people an affordable way to drive a brand new vehicle every couple of years, but how?
The Leasing process
If you have been shopping for a new car within the last few years, you have probably noticed the prominent signs advertising "zero down" and small payments for 24-36 month leases. It sounds too good to be true, which scares a lot of people away. Here is what it means. Leasing is paying the dealer for the use of the car instead of paying for the car itself. The amount that you pay the dealer monthly is the total amount of accumulated depreciation that the vehicle will incur over the length of the lease, broken into equal payments. It is like paying rent to live in a house owned by someone rather than paying a mortgage to live in a house that you will own. The lease payments are always lower than finance payments because you are not paying for the entire cost of the automobile. You are only paying for two or three years worth of depreciation.
The other attractive part of leasing an automobile is that most leased vehicles are under manufacturer warranties throughout the lease life. This is great because you avoid all repair expenses, which for some people can end up being pretty substantial. With a financed car, the length of the payments frequently extends past the warranty period, so that people can get stuck paying for their car and paying to get it repaired.
Leasing, however, is not for everyone. The biggest obstacle for most people is the fact that almost all leases penalize you ten or fifteen cents per mile for every mile over 15,000 that the car is driven each year. For people who commute to work or do a lot of driving on vacations, 15,000 miles a year is simply not adequate. These types of people definitely should not lease. Secondly, leasing can turn into a continuous cycle of monthly payments should you just keep rolling over leases to new vehicles every few years. Do not forget that even though financing payments are higher and last longer in most cases, once the last payment is made you own the car and are done with car payments. A final obstacle for leasing is that the vehicle must be returned to the dealer exactly as purchased. So if you are interested in customized stereos, rims, or tinted glass, forget about leasing. That also means that you will be given a repair bill for any blemishes on the cars interior or exterior. If this makes you nervous (especially those with children), leasing may not be the way to go.
At the end of the lease, you have the option to purchase the vehicle or simply walk away. The price that you will pay for the car may or may not have been negotiated at the inception of the lease. With the common closed-end lease, the residual value is calculated when you sign the original lease. Therefore, if market value is higher than your predetermined price, you profit at the end of the lease. You pay the same regardless of market value. An open-end lease, on the other hand, makes the leasee responsible for any difference between the vehicles residual value and its actual market value at lease end. You should avoid open-end leases at all costs, as the very rarely result in you profiting.
Comparing leasing and buying
Monthly payments on a leased vehicle are applied to the depreciation and use of the vehicle. Monthly payments on a financed vehicle are applied to the actual purchase of the automobile.
Leasing often requires no down payment, purchasing does, in the form of cash or trade-in.
Monthly financing payments are higher than monthly lease payments because they are based on the total value of the vehicle, not just its depreciation.
The length of a typical two or three year lease is about half the time of a typical four or five year lease.
Leasing sets predetermined mileage limits, purchasing does not.
A leased vehicle must be maintained immaculately and return to the dealer unaltered. A purchased vehicle can be maintained any way and can be customized to the owners desire.
Maintenance costs will be lower on a leased car because if you finance a car the payment period usually extends beyond the typical manufacturer warranty period.
Getting the best deal on a lease
As with any major purchase, make sure that you shop around. The competition for new car sales is fervent. Different dealers and manufacturers will offer competitive lease rates and will negotiate. Once you find the best deal, take your time reading every contractual stipulation. Do not be surprised to fine hidden charges for destination fees, deposits, service charges, registration fees, and the like. Also be sure and request a closed-end lease so that if the actual value of the car at lease-end is greater than the residual value, you can buy the car and sell it at a profit. Another good rule of thumb is to only lease vehicles that hold there value extremely well, thereby reducing your payments. The final suggestion we have for getting a great deal on your lease is to negotiate the price of the car before you negotiate the terms of the lease. This way you can feel confident that you are getting the best deal.
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