Car Lease Vs. Buy Analysis

Car dealers may offer both leasing options and long-term financing for buyers.

Getting a new car is a major financial commitment, one that represents a substantial amount of money and a car that the buyer is likely to be forced to live with for a number of years. Buying and leasing are the two major options for getting a new car and each has its own advantages and drawbacks.

Definitions

Buying a car can mean a number of things. Paying the full purchase price with a cashier's check is one option. However, long-term financing through a bank or automaker's financing arm is more common. A lease is essentially a long-term rental, with the driver making monthly payments for a period of around three years. At the end of the lease period, the driver must return the car to the dealer.

Similarities

Buying and leasing a new car have certain things in common, especially in the case of long-term financing for buyers. In both cases the driver makes a down payment, which the dealer subtracts from the price of the car before computing monthly payments. Drivers must also make monthly payments promptly for a purchase or lease in order to avoid late penalties and possible repossession of the vehicle. Both methods also include interest that a buyer who pays cash up front would not need to pay.

Pros and Cons

Buying a new car has the advantage of building equity, as the buyer owns the car outright at the end of the payment term. Drivers who lease cars are able to always have a relatively new vehicle, but never have the option of selling or trading in vehicles that they own. In addition, leases come with a mileage limit and drivers who exceed the limit (usually between 10,000 and 15,000 miles a year) may be required to pay additional mileage fees.

Costs

Leasing and buying can actually make the same vehicle come with two very different price tags. Auto dealers include a buyout price in each lease agreement that allows the driver to purchase the car at the end of the lease. However, this amount is usually much higher than the fair market value of the car at that point. Buying a car costs less in the long run but requires the driver to keep the same car for a longer period of time.

Lifestyle

Ultimately the choice between buying and leasing a new car depends on the driver's financial situation and lifestyle. Drivers who want a new car every few years and can afford the higher cost of a lease might wish never to buy a car outright. On the other hand, drivers who want the same vehicle for an extended period of time and want to build equity by making monthly payments on a car they will one day own should probably buy rather than lease.

References

• Cars: To Buy or to Lease?
• Yahoo Finance: The Buy vs Lease Decision

Resources

• Edmunds: Compare the Costs: Buying vs. Leasing vs. Buying a Used Car