Why lease?
Leases are not complex but they do have their own vocabulary. We hope that this guide will help you with some terms and thoughts regarding your decision whether to lease or buy. Should you have more questions after reading this article we will be happy to answer them for you. Call Mike at 414-716-1012.
Leases and purchase loans are simply two different methods of automobile financing. A lease finances the use of a vehicle and a loan finances the purchase of a vehicle. Each has its own benefits and drawbacks.
When you buy you pay for the entire cost of the vehicle regardless of how many miles you drive it. You typically make a down payment, pay sales tax in cash or roll them into your loan and pay an interest rate, based on your credit situation, for the use of that money.
When you lease, you pay for only a portion of the vehicle cost, which is that part you use up during the time you're driving it. You have the option of not making a down payment, you pay sale tax only on your monthly payment and you pay a financial rate, called a money factor. This is very similar to an interest rate. You may also be required to pay fees and possibly a security deposit. At the lease end, you either return the vehicle, or purchase it for its depreciated value.
Buy vs. Lease:
As an example, if you lease a $20,000 car that will have an estimate value at the end of 24 months of $13,000 (residual), then you pay for the $7,000 difference, plus finance charges, plus any fees.
When you buy a $20,000 vehicle, you pay the entire $20,000 plus finance charges, plus any fees.
This is fundamentally why leasing offers significantly lower monthly payments than buying.
So, buying a car with a loan is essentially like putting money into a declining-value savings account-you never get out as much as you put in. A portion of every payment you make is lost to depreciation and finance charges. What you have "to show" for your investment when your loan is paid off is only the part that is left over after depreciation and interest. A terrible investment by any measure. But cars are not usually purchased as investments, are they?
Leasing then is similar to buying but without the equity "savings account".
You only pay for what you use and do not put anything extra into "savings". It is true that you will own nothing at the end of a lease; you'll have nothing "to show" for the money you've put into it. But? what you don't own is the same part of the car's original value-the depreciated part-that a buyer too doesn't own at the end of his loan. Again, a car's value depreciates the same amount whether it is leased or purchased. That money is gone forever, lease or buy.
With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing-such as paying the mortgage or buying groceries.
The short term cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying. For the same car, same price, same term, and same down payment, monthly lease payments will always be 30% to 60% lower than loan payments. This is still true even when compared to 0% or low-interest loans.
The medium-term cost of leasing is ABOUT THE SAME as the cost of buying, assuming the buyer sells/trades his vehicle at loan-end and the leaser returns her vehicle at lease-end.
The overall cost of leasing compared to buying, over the same lease/loan term, is approximately the same, assuming the buyer sells the vehicle at the end of the loan. Comparisons sometimes show buying to cost a little less than leasing due to fewer fees, lower total finance costs, and the assumption that a purchased vehicle will return full market value if it is sold or traded at the end of the loan (often a bad assumption, especially if traded).
However, when the benefits of wisely investing monthly lease savings are considered, and sales tax savings (in most states), the net cost of leasing can easily be less than buying.
The long-term cost of leasing is ALWAYS MORE than the cost of buying, assuming the buyer keeps his vehicle after loan-end. If a buyer keeps his car after the loan has been paid off and drives it for many more years, the cost is spread over a longer term. It doesn't take rocket science to figure out that the cost of buying one car and driving it for ten years is less expensive than leasing or buying five different cars over the same period. Therefore, leasing is always more expensive than long-term buying. If long-term financial cost savings were the most important objective in acquiring a new car, it would always be best to but the car and drive it for as long as it survives-or until the cost of maintenance and repairs begins to exceed the cost of replacing it. However, many automotive consumers have other objectives that reduce the importance of long-term cost savings.
So which is better, lease or buy?
It depends on what's important to you. All of us have different lifestyles and priorities- in cars and finances. Car lease-verses-buy decisions must be made with your own lifestyle and priority attributes in mind.
LEASE:
If you enjoy driving a new car every two or three years, want lower monthly payments, like having a vehicle that has the latest safety features and is always under warranty, don't like selling and trading used cars, don't care about building ownership equity, have a stable, predictable lifestyle, drive an average number of miles, properly maintain your cars and understand how leasing works, then you should lease.
BUY:
If you don't mind higher monthly payments, prefer to build up trade-in or resale equity, like the idea of having ownership, like paying off your loan to be payment free for a while, don't mind the unexpected cost of repairs after the warranty has expired, drive more than the average number of miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, expect lifestyle changes in the near future then you should buy.
ADVANTAGES OF LEASING:
Some terms to help.
Residual value: This is value of the vehicle at the of the lease term, but it is set at the beginning of the lease. Honda consistently has some of the best residual values in the market today being as high as 60%.
Excessive wear and tear.
A lease through American Honda means that you have a $1,500 allowance for normal wear and tear ( covering any single event up to $500) and will cover, dings, scratches, tears etc.
One other thing.
Most car leases have automatic built-in GAP coverage, while car purchase loans almost do not. GAP insurance pays the difference between what you owe and what the vehicle is currently worth, in the event of theft and or total loss.
This is so important in trying economic times when vehicles depreciate faster than normal and especially when previous loans have rolled into current loans and very
Quickly you can be "upside down" in your loan. This comes as a very big surprise to many people and can very quickly be thousands of dollars.
Nearly all leases have GAP protection, but most loans do not. You are better protected by a lease unless you purchase the GAP the insurance at extra cost.
Finally.
Business use of leased vehicles may have many tax advantages to the business owner, and is well worth discussing with your accountant.
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