Auto Loans: To Lease or Buy, That's the Question

You need a car and you want a new one. You even know the exact vehicle you'll get. Now you have to decide whether to lease the car or buy it outright with an auto loan (assuming you don't have thousands in cash lying around).

First, ask yourself for how long you want the car. Leasing a vehicle means that you take it for a specified lease period (usually 2-4 years) and then return it. Buying means you can keep the automobile for as long as you want. Which is best for you?

Auto Loans vs. Leasing: Immediate Acquisition Costs

When you lease a vehicle, you must pay the first month's payment and a 'capitalized cost reduction' which is like a down payment. When you buy the vehicle you either pay the total price or a down payment by cash or trade-in.

Don't get confused by the terms. Just ask the dealer point-blank the total amount you will have to pay upfront to get the automobile.

With both leasing and buying, you must pay taxes, registration and other fees, and any other charges the dealer may impose. You must also cover safety and emissions inspections while you drive the car.

Auto Loan vs. Lease Monthly Payments

Monthly lease payments are usually lower than auto loan payments. This is because you must pay the whole purchase price of the car, plus interest and finance charges when you buy a car. You don't have to pay the purchase price when you lease.

Early Termination

Another question to ask the dealer point-blank: "Do I have to pay anything if I end the contract early?"

Your lease agreement will most likely contain a clause stating that you must pay 'early termination' charges if you end the contract early. If you buy, you simply pay the remaining principal and interest on the car loan.

What happens when the contract is completed

When your lease is up, you may simply pay the end of lease payment and return the car, lease another car, or, if you have a purchase option, make a large payment to purchase it. If you buy the car, it is now completely yours.

Practically speaking, whether or not you come out on top one way or another will depend on what the car is actually worth at the end of three years, or however long the lease period will be. Since you get to keep the car, you have built up equity in it in some respects. If you wanted to get some of the money you spent back, you could sell it.

The potential disadvantage to buying comes if the car drops significantly in value. Meanwhile, leasing eliminates most of the cost variability involved in owning a car by letting you know in advance how much you are really paying.

Still, if you're willing to keep the car for as long as you can drive it, the loss in value of a car you own is not so important. Even if its value has dropped due to changing fashions or scratched paint, you would not have to buy another car, which could be a big money-saver on its own.

Usage Restrictions and Penalties

There are 2 restrictions if you lease, which carry a financial penalty if you exceed them:

• 1. Mileage. Lessors usually limit the number of miles you can put on the car and you must pay an extra, per-mile fee if you exceed that limit.
• 2. Wear. Your lease agreement will also specify the accepted amount of wear. Again, if you exceed that wear amount, you will pay extra.

Of course, practically speaking, a car you own will also have a kind of mileage and wear penalty: the drop in the value of the car. Again, if you are planning on keeping the car for as long as possible, buying may be a better alternative in any case. If you take good care of the car's essential parts despite the mileage or visible wear, and if the car cooperates by not spontaneously giving out, you will have all that money in your pocket that you didn't spend on leasing or buying another car.

Credit

There is one factor that is the same for leasing or buying: credit. Both situations will require a credit check because, in both cases, someone is allowing you to borrow something. If you have a good credit status, there will not be a problem.

If you have bad credit, you may have more difficulty buying or leasing. Your terms and rates will probably be higher than average. But, don't be discouraged. Think of this as of a chance not only to get the car you want, but also to improve your credit.

In the end, if you're planning on keeping your car for as long as it is drivable, owning is usually the best option. Otherwise, whether to lease or buy a car is not a clear-cut good or bad financial decision. Like choosing a car make and model, it all depends on you, what you need, and what you feel most comfortable with.