New Car

by MICHAEL COOPER

So you've been hemming and hawing over lease vs. buy for awhile. Maybe you've got a friend who recommends buying but that low monthly payment on a lease looks very attractive. Or maybe your company leases and you want to know if it would work right for you. But honestly, what is the difference between the two?

Well the first difference is simple when you buy the car, you own it. When you lease the car the leasing company owns it. That part is the simplest, and you probably knew it. One of the best ways to look at the difference is that when you buy a car, you obviously pay for the whole value of the car. When you leas a car you pay only for the depreciation of the vehicle while you use it plus any finance charges, monthly sales taxes and other fees.

Here's a scenario: you purchase a $30,000 car and use it for 3 years applying less than 10,000 miles a year. With that mileage and time the vehicle is considered to be worth $16,000. You then will pay $14,000 plus any of the other charges that the lease may incur. Your monthly payments on such a lease (at 6%) would be roughly $490. You would pay $910 a month on a loan of $30,000 to repay it in 3 years.

Well the low payment seems nice, what's the downside to a lease?

If having a new vehicle every three years or so with no risk of cost from major repairs is more important to you than ownership and being debt free for awhile, then a lease is the way to go. However, if you can handle the higher payments with the upside being longer term savings, then buying makes the most sense for you.

What are the costs differences between buying and leasing?

When you buy a vehicle, expect to pay the following (varies state by state): Down Payment Sales Tax on the whole value of the vehicle Title Fee Title Tax Registration/Tag Fee Document Fee

When you lease a vehicle, expect to pay the following (varies state by state): Down Payment (if you desire - depends on lease program) Tax on downpayment (if paid) First Monthly Payment Sales Tax on only each monthly payment Security Deposit Aquisition Fee (Bank Fee - similar to points on a mortgage) Title Fee Title Tax Registration/Tag Fee Document Fee

One of the things that causes a lot of people to be concerned with leasing is the complexity of the process. It is somewhat more detailed than buying a car, but in addition to this one, there are many sites on the internet that have great information on what to look out for when leasing a car. Since its so much cheaper to get the car out the door, should I consider a lease to own program?

Unless you have a very good reason for wanting to do a lease to own program it is strongly recommended against. In 99.9% of circumstances you will pay more if you lease a car and then buy it out at the end. Consider the example above where it was determined that over the 3 year term you will pay $14,000 for the car. With the monthly taxes, yearly fees, and lease inception fees you will have paid roughly an additional $2000 (depends a lot on the lease program - but this is a somewhat conservative estimate).

That means that at the end of the 3 years you will have paid $16,000 and have no equity - there is no trade-in value on a lease return. The car is still worth $16,000 and now you are looking at $16,000 over the next 3 years again to finally own the car. If you had opted for a 72 month loan, you would have paid roughly $50/month less and the overall cost of the vehicle would be over $5000 less.

Keep in mind these are all just examples and every situation varies with state rules, different interest rates for the lease vs the loan etc...