Issue: Mar 2006


Leasing vs. Buying -- What's Better?



There are benefits and drawbacks to both

by Ben Adler

Leasing vs. Buying a Car

NADAguides.com Sorts Through the Confusion, Offers Expert Advice

Spring is right around the corner and that means the busy car-buying season is upon us. If you're in the market for a new car but can't decide between leasing or buying one, the experts at NADAguides.com sort through the confusion to help shoppers make an educated decision.

Leasing vs. Buying -- What's the Difference?

Leasing is a lot like renting a car. In essence, you pay money over a specified period of time for the privilege of driving a particular vehicle. Or, looking at it another way, leasing is similar to obtaining a loan to buy a car, with a balloon payment at the end of the lease term. With most lease agreements, however, you don't own the vehicle when the lease is complete and you're required to return the car to the leasing company at the end of the term. Conversely, when you finance a car with the intent of purchasing it, you become the official owner of the vehicle when the loan is paid in full.

Leasing vs. Buying -- What's Better?

Leasing Benefits -- Your payments are not determined by the total cost of the car, but rather the amount the car depreciates while you use it. As a result, your monthly payments are usually lower than payments for a standard car loan. Also, most leases require little or no down payment and there are no up-front sales tax payments. Additionally, leasing offers an affordable and convenient way to drive a new car every few years -- in most cases, a car that's covered under a manufacturer's warranty. And since many cars require costly service for mechanical breakdowns and wear and tear as they age, this is a very attractive feature. And if you're self employed or if you own a small company that provides cars for its employees, part of the lease payments can be deducted at tax time.

Leasing Drawbacks -- With leases come mileage restrictions, and if you drive the car over the mileage specified in your leasing contract, you'll be required to pay a penalty at the end of the lease term. Before you consider leasing, consider the miles you drive ahead of time. And in some cases, there are other hefty fees the lessee is responsible for at the time the vehicle is returned. What's more, lenders usually require higher insurance coverage costs for leased vehicles. Finally, some people argue the entire process is confusing and leases are difficult to terminate early.

Buying Benefits -- By far, the greatest benefit of financing a car for purchase is the fact that you own the car when the loan is paid in full. And when you own a vehicle, you're not confined to mileage restrictions set forth by a leasing company, you can modify the car any way you like, and you have an asset of value. You can sell the car outright or you can trade it in towards the purchase of a new one. And if you buy a car, your lender will typically require less coverage than if you lease one.

Buying Drawbacks -- One of the most significant drawbacks to owning a car is the fact that once the warranty expires, you're responsible for repairs. And as a car ages, those repairs can become more and more expensive. And if you don't trade in your car every few years towards the purchase of a newer one, you could end up driving the same car for longer periods of time -- if you like the idea of driving a new car every few years, this could certainly be a buying deterrent. Remember, too, that even though you own your car, it doesn't mean you can drive your car excessively with total disregard for mileage. With buying or leasing, high mileage usually always impacts a car's value in a negative way. Finally, vehicles lose the majority of their value within the first few years of ownership. If you buy a vehicle, you -- the owner -- suffer the brunt of the car's depreciation.

Leasing vs. Buying -- What's Best for Me?

"It boils down to personal preference and pure mathematics," said Mark Perleberg, lead auto expert, NADAguides.com. One of the most important things to understand, he says, is 'leasing lingo,' including understanding what the words 'residual,' 'cap cost' and 'cap reduction' mean and how they impact the overall structure of your lease.

"Simply defined, a residual value is the amount of money for which you could buy a car at the end of a lease term and it's a major part of the mathematical equation that determines what your monthly payments will ultimately be," said Perleberg.

He cautions that equal dollar cars won't necessarily have the same payment from lease to loan and that companies responsible for producing residual values take into consideration things like prior sales history, body style changes, rental car inventory and economic factors that will effect future resale values.

According to Perleberg, the best place to start is by doing your homework ahead of time, before you sign on the dotted line.

"Check out the information at NADAguides.com, including lease calculators and informative articles to help you make the right decision. Information is power, so use it to your advantage. It could end up saving you hundreds of dollars -- if not thousands of dollars -- in the end."

About NADAguides.com

N.A.D.A. Appraisal Guides (NADAguides.com) is the world's largest publisher of vehicle valuations and specification information for new and used cars, trucks, vans, and SUVs, as well as van conversions, limousines, classic and collectible cars, boats, RVs, motorcycles, snowmobiles, personal watercraft and manufactured housing. The company's consumer website, NADAguides.com (www.NADAguides.com), offers a variety of new and used vehicle services in addition to valuation information. Throughout its 72-year history, N.A.D.A. Appraisal Guides has earned the reputation as the recognized authority for vehicle valuations. Its website, NADAguides.com, is the most comprehensive vehicle information resource on the Internet today.


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