Should You Lease or Buy a Vehicle

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Posted by, Elizabeth Retton

Auto Lease When it comes time to turn in your old clunker for a shiny new set of wheels, you may find yourself facing a conundrum. With the economy in recession, you may not be keen to take out a car loan (especially if you fear future layoffs at your place of employment). But you’ve never been particularly fond of the idea of “renting” a car. In truth, there are pros and cons to each method of gaining a mode of transportation. So if you’re in desperate need of a dependable car and you just can’t decide which way to go, here are a few helpful hints that may make your decision easier.

Let’s start with the concept of leasing, which many peoplescorn. Since we live in a consumer society, we’re taught that ownership is the ultimate goal when it comes to assets. But you can’t really think of your car as an asset because it ONLY depreciates in value. A home or other property will gain value over time, so that you can make money when you sell it (if you wait long enough, home values will always go up). But a car is more like a tool.

While it is certainly expensive, its purpose is not to make you money down the road, but to get you from here to there. It is a machine, not an asset. So rather than thinking of a lease as “renting”, consider it an extended test drive that gives you an easy out and a brand new car to drive in a couple of years if you don’t like the one you picked. And if you do like it, well, your lease payments make for a nice down payment and you’ll take out a loan at a much lower value, saving you a ton of money on interest and related fees.

As for the monthly cost, you’ll likely pay less for a lease. This is because of the way value and depreciation is calculated. If you buy a car, you’re taking out a loan for the entire value of the new product and then paying fees and interest based on that value. When you lease, you’re only paying for the difference in value over the course of the lease. Suppose, for example, that you lease a vehicle worth $30,000, but at the end of the lease it is only worth $20,000. Your payments will be based on the difference between these two numbers because the lessor can still turn around and sell it for $20,000 if you turn it in and lease another vehicle. So your monthly payments could be significantly lower with a lease.

Now, there are some merits to buying. At some point, you’re going to own the vehicle (albeit at a far lower value than you paid) and you won’t have to make payments any more. And for anyone, from soccer moms to truck drivers insurance will eventually be lower if you own the vehicle you’re driving, since leasing requires full coverage insurance, whereas you can switch to liability once you hold the pink slip. And of course, you should buy if you know you’ll put a lot of miles on the car, since a lease will charge you for mileage over the standard (usually 15,000 miles per year).

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