Need a Car: Should You Lease or Buy?

Elaine Bedel established Bedel Financial in 1989 in Indianapolis.

Buying a car and keeping it for seven to ten years or longer will generally provide a better financial result than leasing. However, if your personal preference is to lease, then be a smart consumer.

If you enjoy always having a new vehicle, drive an average amount of miles per year, and need a lower payment to afford a nice car, then you could be a good candidate for leasing. While there are benefits to leasing, consider the disadvantages before you make your decision.

Benefits of Leasing

• Lower monthly payment than if you were to purchase/finance the vehicle.
• Ability to afford a nicer vehicle.
• Minimal to no down payment required.
• Less sales tax because you pay only for the time you will be driving the vehicle, i.e. the term of the lease
• Ability to drive a new car every few years.
• Most repairs and routine maintenance are covered under warranty and/or the lease contract.
• Once the lease contract expires, there is no further obligation.

Disadvantages

• Ongoing car payment. Leasing a car is comparable to renting instead of purchasing a residence. 
• Mileage limitations may cause you to pay more than expected.
• Requirement to pay for damage that is more than normal "wear and tear" when turning in the vehicle.
• Your lease is a contract and you are obligated for the term of the lease. You cannot decide to "turn-in" the vehicle to the dealer if you run into difficult financial times or change your mind. If you die, your estate is liable for the completion of the lease contract.

Before You Sign

Before you decide to lease, assess your driving habits. If you drive more than 12,000 miles per year, you may exceed your limit. You can buy additional miles up front at a lower cost than paying for any overage when you return the vehicle.  For example, the average cost for buying mileage when you initiate your lease is $0.05 per mile; it could be $0.25 or more if you pay for it at the end of the lease. 

You can negotiate the price of the vehicle whether you plan to lease or buy. For this reason is it important to do your research to determine a fair price. It is also important to have a good credit score even if you lease. It will be checked, so if you have a freeze on your credit, lift it before you shop. 

Because you pay for maintenance on the leased vehicle, it is smart to keep the term of your lease within the warranty period. Most warranties last three years.

Many consumers are attracted to leasing because it may require a lower down payment than the purchase option. However, your monthly lease payments will be determined based on the amount you pay up-front. The higher the down payment, the lower the monthly lease payment.    

If you lease, you still need to purchase your own auto insurance. However, you will also want gap insurance, which will pay any shortfall between what your insurance company pays the dealership for replacement and the balance of your total lease obligation if your vehicle is totaled or stolen. If gap insurance is not included with your lease, you will need to purchase it with your personal auto policy. Keep in mind that any down payment would be lost if the vehicle was totaled shortly after the deal.

Think twice about purchasing the vehicle at the end of the lease. At the end of the lease, if you decide to purchase your leased vehicle for the agreed upon residual value (which you may have negotiated to be higher rather than lower to reduce the monthly payment), you have compounded your costs.  Purchasing the car at the end of the lease will be more expensive than having purchased it outright.

To further reduce your cost, you may want to consider leasing a used vehicle. This can only be done through a franchised auto dealer that offers leases on used cars. The vehicles must be certified pre-owned with less than 48,000 miles and younger than 4 years. 

Summary

Leasing has its benefits. However, it is important that you recognize the tradeoffs. Wanting a new vehicle every few years is generally the reason people lease. If this is your preference, read and understand the contract before you sign. For more information on leasing, go to www.Edmunds.com. 

This article was contributed by Kathy Hower, CFP, a Wealth Advisor at Bedel Financial Consulting, Inc.

Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, "Your Money" segment. Elaine’s book, "Advice You Never Asked For… But wished you had," is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at ebedel@bedelfinancial.com.