Your Next Car: Buy or Lease?

Financing

Your Next Car: Buy or Lease?

Difference #1: Cost of vehicle

When you purchase a vehicle, you pay for the car’s entire cost, period. You put money up front in the form of a down payment, pay sales tax and then make payments with interest. Your first payment is due a month after you sign the sales contract.

 

On the other hand, you pay for only a portion of the leased vehicle (the portion you “use” for the length of the lease. A down payment isn’t necessary, sales tax is only computed on your monthly lease payments and finance charges. There may be extra fees involved, like a security deposit, which you don’t have to pay when buying. And your first payment is due at the lease signing.

 

Difference #2: Payments

Lease payments have two parts: depreciation charges and finance charges. Loan payments also have two components: principal charges and finance charges. The principal pays off the vehicle purchase price, while the finance charge is loan interest.

 

Difference #3: Vehicles as investments

One of the reasons leasing has become a popular option is because car loans are like putting money into a declining-value savings account — you never get out as much as you put in. A portion of every payment you make is lost to depreciation. What you have "to show" for your investment when your loan is paid off is only what is left over after depreciation, in other words, a really bad investment.

 

Conversely, with leasing, you only pay for what you use, and while you won’t have anything at all to show for your money outlay, what you don’t own is the same depreciated part of the car that a buyer doesn’t own at the end of his loan.

 

Difference #4: Brain drain

Buying a car is fairly straight-forward and easy to understand. Leasing, however, introduces a whole new vocabulary: residuals, money factors, etc. Be sure to read all paperwork and ask if there’s anything you don’t understand. Don’t let the dealer rush you into anything.

 

Difference #5: Gap insurance

Most car leases have built-in gap coverage, while car purchase loans almost always do not. Gap coverage, or gap insurance, pays the difference between what you owe on your loan or lease, and what your vehicle is actually worth if your vehicle is stolen or destroyed.