Do you prefer owning?
The biggest advantage to purchasing your vehicle is that you own
an asset that you can turn around and sell. There's also an end
to your payments. When you lease, you turn in your vehicle but probably
need another, and are then saddled with more payments. For that
reason, once you start leasing it's hard to stop. When you finish
paying off a car you purchased, you have the option of getting a
new one and taking on a new set of payments or sticking with the
car you have, payment-free. Again, if you like to get a new car
every year, it's cheaper to do it by leasing. Some people simply
like the idea or the feel of owning. Others enjoy knowing they're
using the best years of the car and soon will have another new one.
It's up to you. Remember, however, that the equity you build with
a purchase usually is used for the down payment on the next purchase.
Are you short on cash?
Arguments can be made either way on whether it's cheaper to buy
or lease. It depends on your individual circumstances. But one thing's
for sure: Leasing makes for lower monthly payments and typically
no down payment. The reason is simple. Let's say a new Honda Accord
LX costs $24,000. For example, if you make a $3,000 down payment
and buy the car you have to pay off $21,000 in 48 months at 2.9
percent interest. That means a monthly payment of $473.22. Even
if you trade-in your four-year old car worth $10,000 -- financing
$14,000 -- your payments will be $315.48.
But if you choose to lease the same vehicle -- with
the same interest rate and the same down payment -- you don't have
to pay off the $21,000 over four years -- you only pay off the amount
the car depreciates over the four years. Here's how it works: Take
the $21,000 and subtract from that the residual value -- how much
the lender predicts the car will be worth at the end of the four
years. Let's say $10,000. So, with a lease you'll have to pay $11,000
($21,000 less $10,000) divided by 48 months, or only $247.88. When
you buy a new car, the value of the car depreciates dramatically
as soon as you drive it off the dealer's lot because it immediately
becomes a "used" car. So, if you buy a new car every few
years, you would regularly incur big losses on your investment in
new cars. By leasing, you avoid this significant loss of value.
How many miles will you drive?
This one's easy. If you're likely to drive more
than 12,000 miles a year, think long and hard before leasing. Purchasing
offers more flexibility, allowing consumers to drive as many miles
as they want. Leases usually limit annual mileage from 10,000 on
the short end to 15,000 on the generous end. They do that because
they want the car to be worth its residual value or more when you
turn it back in. If you go over that limit, you'll have to pay a
penalty, typically 10 cents to 20 cents a mile. You can negotiate
for more miles upfront, but then you'll have to pay more because
the residual value will be less. Now 10 cents may not sound like
much, but 5,000 miles could cost you between $500 and $1,000 cash
at the end of the lease.
Do you take good care of your car?
Similar to the mileage situation, the way you
care for your car is critical. If your cars are in great shape after
three or four years, you're a good candidate for leasing. But some
people just beat cars. If you haul equipment, tools, or a team of
muddy soccer players around, think twice. "The wear-and-tear
charges will amount to hundreds of dollars, which you'll be responsible
for paying," says Spinella.
How's your credit rating?
There's more risk to the lender in a lease than
a purchase because there's usually no down payment and low monthly
payments. Because they have more at risk, the lenders normally require
better credit ratings than they do for people purchasing. If you
plan to lease, check your credit scores before you go to the dealer
and, if necessary, try to get
your scores improved.
Is your lifestyle likely to change?
While life is certainly unpredictable, consider
whether your lifestyle is likely to change during the course of
the lease. Do you plan to move to a new house? Much further from
your job? Do you have a teenager who's going away to school who
won't be adding extra miles? "Let's say an elderly man leases
a vehicle and finds -- in the middle of the lease -- he can't drive
any more for health reasons," says Gentile. This is a contract
-- a long-term commitment -- and another reason not to lease a vehicle
for more than three years. In a lease, you can't sell the car, and
transferring the lease to someone else can be difficult -- and expensive.
Still stumped?
If you're still undecided, try our calculator
to help you decide.
Prakash Gandhi is a freelance
writer based in Florida.
-- Posted: Feb. 15, 2005
