Buying vs. Leasing

[Dan]

We all have reasons why we pay cash, finance, or lease. But do we really understand the differences? Are we making the smartest decision with our money?

Some insist on financing no more than 48 months, others say 60 months. Why, and what's the difference? If you can obtain an interest rate that is the same at 72 months as 60 months, then wouldn't it be smarter to go with the longer term?

Is leasing a car bad? After all, you never own it, and are stuck with making payments forever. So why then, do majority of Lexus, BMW and Mercedes-Benz buyers lease? I'm sure they can afford it cash, right?

Well, let's discuss it:

1. The short-term monthly cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying. For the same car, same price, same term, and same down payment, monthly lease payments will always be 30%-60% lower than loan payments. This is still true even when compared to 0% or low-interest loans.

2. The medium-term cost of leasing is ABOUT THE SAME as the cost of buying, assuming the buyer sells/trades his vehicle at loan-end and the leaser returns her vehicle at lease-end. The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, assuming the buyer sells the vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less than leasing due to fewer fees, lower total finance costs, and the assumption that a purchased vehicle will return full market value if it is sold or traded at the end of the loan (often a bad assumption, especially if traded). However, when the benefits of wisely investing monthly lease savings are considered, the net cost of leasing can easily be less than buying.

3. The long-term cost of leasing is ALWAYS MORE than the cost of buying, assuming the buyer keeps his vehicle for years after loan-end. If a buyer keeps his car after the loan has been paid off and drives it for many more years, the cost is spread over a longer term. It doesn't take rocket science to figure out that the cost of buying one car and driving it for ten years is less expensive than leasing or buying five different cars over the same period. Therefore, leasing is always more expensive than long-term buying. If long-term financial cost savings were the most important objective in acquiring a new car, it would always be best to buy the car and drive it for as long as it survives — or until the cost of maintenance and repairs begins to exceed the cost of replacing it. However, many automotive consumers have other objectives that reduce the importance of long-term cost savings.

So, which is better, lease or buy?

It depends on what's most important to you. All of us have different lifestyles and priorities in cars and in finances. Car lease vs buy decisions must be made with your own lifestyle and priority attributes in mind. What's right for one person can be totally wrong for another.

LEASE - If you enjoy driving a new car every two or three years, want lower monthly payments, like having a car that has the latest safety features and is always under warranty, don't like trading and selling used cars, don't care about building ownership equity, have a stable predictable lifestyle, drive an average number of miles, properly maintain your cars, and are willing to pay more over the long haul to get these benefits, and understand how leasing works, then you should lease.

BUY - If you don't mind higher monthly payments, prefer to build up trade-in or resale value (equity), like the idea of having ownership, like paying off your loan to be payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, expect lifestyle changes in the near future, and don't like the risk of possible lease-end charges — then you should buy.

[MyCARZ]

i've never leased before, only financed. i heard you have to have perfect credit to lease, is that true?

[Dan]

Originally Posted by MyCARZ

i've never leased before, only financed. i heard you have to have perfect credit to lease, is that true?

I think as long as you have fairly decent credit, I'm sure you can lease with pretty good terms.

[DCroft]

Usually you have to have around a 680 Beacon (auto finance) score to lease. The average credit score across the United States right now is a 690. So you just have to have around average or pretty decent car credit history to lease.