Lease Versus Buy

Leasing versus buying a car comes down to one very simple question: Do you plan on keeping the car longer than three to four years? That’s it … mystery solved. If your plan involved keeping the car longer than four years, your best option is to buy. If its less than four years, you are better suited for a lease. Let me explain why.

When you buy a car with cash or a structured payment program, the car becomes your own personal property after the car has been paid for. So you are free to do with it what you wish. People of this category plan on keeping the car until major maintenance is needed, or they finally decide to get a new car. The benefits of owning the car is that after the car is paid for, you have no car payment to pay each month and you can remove collision insurance from your auto insurance policy. Dropping the collision coverage can drop your insurance payments by 50 percent in some cases, so it has a significant impact on your budget if you’re looking to cut costs. Granted, if you are a poor track record as an “Oopsie” driver or have a tendency to hit the proverbial trash can each time you pull into the garage, you might want to weigh your options because a small fender bender can cost $500 or more to repair.

A lease is also a very appealing program if you frequently trade for a new car every three to four years. The way it works is moderately complicated, but put simply, you are only paying for the depreciation of the car instead of the whole car itself. For example, if you happen to love the new BMW that costs $35,000 and you decide to use a lease, your payments will be much lower than if you buy it outright. So you lease the car for a term of forty-eight months, and at the end of those forty-eights months your BMW is now worth $20,000. For math simplicity, you essentially paid a monthly cost of $15,000 divided by forty-eight months (not including taxes and insurance). This is contrary to buying the same BMW at $35,000 and paying twice as much each month. Since you trade cars every four years, you are saving half of your capital (i.e. cash in your bank account) to use for other purchases. However, the reality is you no longer have a car anymore and having an auto lease requires certain restrictions.

First and foremost, is the mileage restriction. When signing a lease, the dealer will inform you how many miles are allowable on the car. There are several choices you can make, and they typically range between 10,000 to 16,000 miles. The dealer will most likely be amenable to increased mileage if you discuss or bargain with him. Increased mileage allowances will also raise your monthly payments, so pay close attention to the price differences. Also, if you exceed the agreed upon mileage limits, you will end up paying a sizeable penalty to the amount of 10 cents to 15 cents per mile.