At one time, nearly everyone bought their new cars directly from a dealership. Only those individuals that were driving a car for business purposes were leasing their vehicles. Today that's all changed, and a growing number of individuals are now leasing instead of buying.
At the one end of the spectrum there are individuals that like the idea of driving a new car every two or three years. At the other end of the spectrum are people that decide to buy a car based on simple economics. For anyone that's sitting at either of these two ends of the spectrum, the decision to buy or lease a car should be an easy one.
In this article, we're going to be discussing the pros and cons of buying versus leasing a car. Then we're going to introduce some online tools that can help everyone to make a more informed decision.
One of the primary reasons many individuals lease their cars is the satisfaction they derive from driving a new vehicle every couple of years. But there are also some other advantages of leasing a car that are worth discussing too.
Most leased cars are returned to the dealership before the manufacturer's warranty has expired. That means most of the expensive repairs, such as installing a new transmission, never come into consideration when leasing. In addition, due to the mileage cap provision of the contract, the car usually has relatively few miles. This makes it a very reliable source of transportation.
Another big advantage of leasing a car is the lack of financial commitment to the vehicle. Most agreements include a capital cost reduction payment, which is similar to a down payment made when buying a car. The capital cost reduction payment is relatively small, and quite affordable, in comparison to a down payment.
In addition, the monthly lease payment for a car is very likely to be lower than a car loan's payment. That's because with a lease, the payment only has to cover the car's depreciation and a financing charge. In other words, the lease payment doesn't have to transfer the full cost of the vehicle to the lessee, only the value they're consuming over the term of the agreement.
Finally, the other big advantage of leasing a car is the tax deduction that may be taken if the vehicle is used for business purposes. The tax laws have been tightened in recent years, but in general, when the car is driven for work-related purposes, the cost of operating the vehicle is deductible from federal income taxes.
As mentioned earlier, perhaps the biggest advantage associated with buying a car has to do with economics. Several more advantages are discussed below, but most of these fundamentally revolve around money matters. In the long run, it's less expensive (cheaper?) to buy a car than to lease one.
During the first year of ownership, the loss in the car's market value is the greatest. In general, depreciation for a car slows as it ages. When leasing a car, the monthly payment needs to account for this high rate of early-life depreciation. When buying a car, the longer it's owned, the lower the average annual depreciation rate.
Another advantage of buying a car is that when the loan is paid in full, the car is owned, which is an asset. If the owner were to fall on hard financial times, they can sell the car for another asset: cash or money. If someone can no longer afford their monthly lease payment, they will need to pay some fairly expensive termination penalties.
Some people might point out the added maintenance expense associated with aging cars is being ignored in the above pros and cons. It's true, as cars age they will start to experience a higher rate of mechanical failure. But in many cases, even an expensive repair is less costly than continuing to make monthly lease payments.
If there's any doubt about the validity of the above assumptions, run through some lease versus buy scenarios. This website has quite a few automobile loan calculators that can be used to help "crunch the numbers," including:
Finally, this website also has a car lease glossary. This article explains the most common terms encountered when reviewing an advertised lease offer, as well as the terms and conditions found in a contract.
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