Leasing versus buying a car: pros and cons
There are many different reasons that a person might lease versus buy… or buy versus lease. For example, in a lease situation, the monthly payment is almost always lower given similar vehicles. But on the other hand, generally, a lease will typically cost you more in terms of “true cost of ownership” if you want to keep the car over the longer haul. Let’s examine some of the pros and cons of leasing versus buying:
- Payment amounts. In general, a lease payment will be less than a payment for purchasing the vehicle, all other things being equal. This only makes sense because you aren’t going to keep the vehicle at the end of the lease period. You give it back to the dealership. So if you are looking for a lower payment, a lease may be the better option for you.
- Ownership status and value. You never own a leased vehicle. That means that all the money you spent to lease it never contributes to you taking ownership of the car or truck you are leasing. It only goes to “pay the rent” on the vehicle. If you are a person who trades in a vehicle regularly, that may mean a lease would be better for you. But if you like to keep a car for a longer period of time, buying the vehicle may make more sense as it will save you money.
- Tax breaks. Most people think that only businesses that lease vehicles get tax breaks. That’s true for the most part, but in most states, the sales tax that is charged on a lease is only charged on the monthly payment amount, not on the actual value of the vehicle. That means you do get a tax break when leasing. If you have a business and can legitimately lease the vehicle through the business for business purposes, the tax breaks get even better. Consult your tax advisor for more information about tax breaks with regard to leasing a vehicle.
- Mileage fees. With a lease, if you exceed the mileage allotment you agreed to as part of the lease agreement, you’ll have to pay heavy fees because of that mileage overage. That doesn’t happen to you when you purchase a vehicle. But, in all cases, a car with more miles is almost always worth less than the same car with lower miles (assuming similar maintenance and accident records). So in effect, you do pay a “mileage penalty” even when you own a vehicle. It’s just not as hefty as the one you pay for with a lease.
- No early exit from a lease. It’s typically much easier to “get out” of a vehicle you have purchased versus one you have leased (assuming that you aren’t significantly “under water” as regards the loan on the purchased vehicle. With a lease, you’re pretty much on the hook. There are websites such as www.leasetrader.com, www.autotrader.com, and www.swaplease.com that can help you to get out of a lease that you don’t want anymore.
- Built-in Gap insurance with a lease. Gap insurance pays the difference between what you owe on a vehicle lease or a purchase and what the insurance covers in the event that the car is in an accident and is totaled. With most leases, Gap insurance is included as part of the lease. With a vehicle purchase, you typically have to purchase it yourself as an added expense.
- Responsibility for vehicle repairs and maintenance. In a purchase, the responsibility for the vehicle in terms of maintenance, damage, etc. falls on the buyer for as long as the buyer owns the vehicle. Because of this, people often purchase extended warranties and other protection services to help mitigate the cost of a problem should one occur. Insurance is an example of this, but insurance is required for all drivers under law so whether you lease or buy, you still must have insurance. Under a lease scenario, the lessee is only responsible for vehicle maintenance and problems during the term of the lease. After that period, they no longer have any responsibility for maintenance or other issues that may occur. Because a large number of leases are done for new cars that are under full warranties, people who lease vehicles rarely have significant maintenance or repair costs.
- Resale value. When a person purchases a car or truck, the “full value” of that vehicle is transferred to the person making the purchase once the loan has been paid off. That means that the buyer can, at some later date, sell the vehicle and receive the value of the vehicle at that time. Note that depreciation costs will apply. In a lease situation, the lessee has no claim on the value of the leased car or truck at the end of the lease term.
- Depreciation. When looking at leasing versus buying, depreciation must be taken into account. Because a new car or truck depreciates dramatically the minute you drive it off the lot, you lose a tremendous amount of value once you purchase the vehicle. But you also “lose” that value when you lease a vehicle. As was noted above, there is a “depreciation charge” in the lease that is designed to cover the cost of the loss of value of the vehicle over time. Typically, individuals cannot “write off” depreciation on their taxes… but businesses can. So, using the depreciation may make sense if you can legitimately lease or purchase the vehicle through a business. Consult your tax advisor to understand the options you have under the law.