One of the most important decisions facing car shoppers is whether to buy or to lease. With a purchase this profound, the pros and cons need to be considered carefully.
At first glance, leasing may not appear to be an attractive option. After all, at the end of the lease, you likely will return the car to the dealer and have nothing to show for it other than memories. When you've paid off a car loan, you get to keep the car and continue driving it, trade it for another one or sell it for the cash. Why make payments on something that you can't keep?
If you don't drive much and intend on keeping your car for many years, leasing is probably not for you. But the American car consumer typically changes cars every three to four years, and car loans that last six years are increasingly common, so many people never own their cars outright. The bank does.
Leasing is ideal for drivers who like to have a new set of wheels every few years while avoiding the disadvantages of owning a car. Those include depreciation of value as soon as you drive the car off the lot; further depreciation because of age, an accident or the model's being discontinued; increased maintenance costs as the car ages; and paying sales tax on the total cost of the car when purchased. In most states, leases include sales tax only on the monthly payments and down payment, if any.
"If I look at the total cost of ownership and with the average American wanting a new or different car every three or four years, my total cost of ownership is going to be far less by leasing it than it is by buying it," says Jud Deshler, manager of Internet sales at Kings Ford. "And if I'm giving Uncle Sam less of my money in taxes, I'm OK with that also."
Beware of the monthly rates touted in advertisements for leases. Most of them include some form of capitalized cost reduction, such as a down payment. Any money down will not affect the terms of the lease other than the monthly payment. The more you put down the less you pay per month. Another cost that may get lost in the fine print is the disposition fee, typically between $200 and $500, which is due when the lease is over and you choose to hand over the keys and walk away. The bank uses the fee to offset the cost of selling the car.
Yet another factor to consider is the mileage restriction that leases contain. Typically about 15,000 miles per year, they can have steep penalties if you surpass the limit, as much as 30 cents per mile.
For long-haul drivers or those who become attached to their cars, buying is the better option. But for a city driver who desires the safety and security of having a newer vehicle, signing a lease should be seriously considered.
"I like the idea of a short-term lease. I think the shortest term you can get is the best -- two years or three years," Deshler says. "And how about having a car where you're covered by the manufacturer's warranty the entire time you have an obligation to the car?"
For peace of mind, many leases include gap coverage in the monthly payments; others charge a fee. This protects the consumer in the event the car is stolen or totaled in a crash, and it covers the amount left over after the insurance company has honored the claim. Not surprisingly, insurance adjusters are known for paying out the least amount possible. Even though this coverage may never be used, it's important to know whether it's included in the lease.
"Banks typically charge between $500 and $700 for that over the term of the lease," Deshler says.