Buying a car is a huge purchase, usually second only to buying a house. With most new cars and trucks costing $20,000 to $30,000, before you shop, you should definitely do a little homework. One of the most frequently asked questions by those interested in buying a new car is whether to buy or lease, here are some tips.
What is Leasing?
Before you decide whether or not to lease a new car, it is important to understand what the term “lease” means. Leasing is when one rents a new car (or sometimes a used car) for a long period of time. Most leases are offered for periods of 2 to 4 years. It should also be noted that in some cases (e.g. luxury vehicles) a six month lease can be available. Instead of buying a car, you in effect rent the vehicle, which at the end of the lease must be returned or in many instances you can purchase the vehicle at a special price from the dealer.
The Advantages of Leasing a Car
The biggest advantage of leasing a car is that in most cases your monthly payment for the vehicle will be less than buying it. When you buy a vehicle, your bank loan reflects the entire purchase price, plus tax. When you lease a vehicle, your monthly payments only reflect the amount or value of the vehicle that you use. For instance, if you lease a $20,000 car for three years, the dealership will charge you the value of the vehicle for those three years. Since most vehicles lose about 50% of their worth in the first three years, your monthly payments over three years will usually only reflect that $10,000 that you used of the vehicle, making your payments substantially lower than if you purchased the car with a three year loan- your payments for those three years would be twice as much.
Another advantage to leasing is that in many cases, your lease payments can be fully or partially tax deductible. For instance, if you use the vehicle for business you should be able to deduct some of the costs of owning the car each year when you file your taxes. It is important to note that you should talk to an accountant before leasing to see exactly what your tax deductions can be (if any).
Disadvantages to Leasing a Car
While leasing might sound like a great idea, it is definitely not for everyone. One of the biggest reasons most customers do not lease their car is that at the end of the lease, they do not own it. Leasing a car is temporary, after the leasing period is over, you will need to give back your vehicle. For many customers, paying large car payments month after month and having nothing to show for it at the end of the lease agreement is definitely not a good deal. If you are the type of person that likes to drive a new car every couple of years, then leasing might be attractive, but for those that want their own car for five years or more, forget about the leasing option.
Another disadvantage to leasing a car is that there can be many hidden fees involved with leasing, for instance, most leases have a small mileage allowance. For instance, if you lease a car, expect an allowance of about 12,000 miles per year, anything more and you will have to pay a penalty. If you drive 15,000 or 20,000 miles a year, you may have to pay $.10, $.15 or even $.25 extra per mile. In addition, when you return your vehicle, you may also have to pay fees for wear and tear, dents, any accessories such as radios you have installed in the vehicle, etc.
While leasing can be attractive for many car shoppers, it is not for everyone, make sure you do your homework to determine whether or not leasing is for you.