Car Purchase Options: Lease versus Buy

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Car Purchase Options: Lease versus Buy
January 8, 2014

The average price of a new car today is over $31,000. The old adage of paying cash in full to avoid any financing is simply not a viable option for most of us when it comes to acquiring newer, reliable transportation. The choices that remain are leasing or buying your vehicle. Before you commit to either option, there are some pros and cons to consider when deciding which alternative will work best for you.

If you think you will be able to keep your car for a decade or more, then you should purchase the most reliable vehicle, at the lowest cost and interest rate possible, with the most money down. Ideally, you should buy a car that is a year or two old to avoid the instant depreciation that occurs when you drive a brand new car home from the dealership. Using this strategy, you will build equity and experience the added cash-flow benefit of not having a monthly car payment from the time you pay the car off, right up to the point where you start paying more on your repair bills. The overall safety and reliability of the vehicle may also start to decline, which should be factored into how long you ultimately decide to keep the vehicle.

For many individuals, a smaller monthly budget for transportation combined with little-to-no money down may rule out your option to buy a newer car altogether. While leasing a car is significantly less per month than purchasing one, you will not be building any equity. You will not have anything to show for your money at the end of your lease. Moreover, you will have to make the lease or buy (or buy your lease) decision all over again when your lease is up.

Leases require you to stay within specific annual mileage limits (typically 12,000 to 15,000 miles per year). If you exceed these limits, you will be charged per mile. You should also consider how your lifestyle would affect the general wear and tear on the vehicle. When you turn in your lease, you will be charged for dings, dents and other damage to the exterior and interior of the car. If you will be hauling the soccer team daily, if you are slightly more fender-bender-prone, or you plan on porting your pooch everywhere you go, the purchase option may be more appealing — as opposed to getting nickel and dimed at the end of your lease.

The advantages of leasing over buying include being able to afford a costlier or flashier car than you could afford to buy. Many leases also come equipped with warranties, reducing the amount of major repair bills, which could range from hundreds to several thousand dollars. Some leases even include routine maintenance like oil changes, adding to your ability to predictably budget each month. Leasing a newer car is also the safer and more reliable choice than purchasing an older one, as frequent visits to the service bay can exasperate an already fragile financial situation. Not only are such visits costly, they are also extremely stressful and inconvenient.

One must-have if you go the leasing route is Guaranteed Auto Protection (GAP) insurance. If you were to total your leased car, GAP insurance covers what you still owe on the lease. However, carefully consider the other types of protection offers the dealership tries to sell you. Investigate what your insurance policy would include for the vehicle you are eyeing in order to avoid any duplicate or unnecessary coverage.

Because the decision to lease or buy depends so heavily on your lifestyle and budget, it is important to think about how much you expect your life to change over the next few years. For example, a promotion to district sales manager and the accompanying obligation to be constantly on the road could change your decision. On the other hand, having children may influence your vehicle choice altogether in terms of size, safety requirements and budget. Finding the right fit for your present and future lifestyle, considering how having reliable transportation impacts your income-earning potential, plus the amount you are willing to budget on a monthly basis — these will all be key to helping you make the best decision for your personal financial situation.

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