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To Buy or Not to Buy, That is the Question… Or Maybe Just Lease?
Published Date : July 22, 2016
Use it up, wear it out… make it do, or do without. This old New England proverb is generally good financial advice, especially with big commitments like vehicles. Thus owning an affordable car is usually good practice over the long run. But car leasing has come a long way – due to improvements in residual values for many cars and currently low interest rates. A generation ago, leasing was mostly for business purposes or for those who simply could not afford to buy a car or get financing. Given constant improvements in vehicle technology, design, and safety, leasing now offers some potential advantages and conveniences to ownership. While beyond the scope of this article, buying used cars – now commonly known as pre-owned – can also be attractive because of the inherent depreciation that occurs with most cars. Leasing for used cars, though, is rarely available.
Effectively, leasing enables many people to drive nicer cars than they might otherwise be able to easily afford, and this feature in-and-of itself is often highlighted as part of the potential temptation with leasing; however, it frequently results in people reaching beyond their means. Ideally, people should probably pick a car they can afford and then decide whether to buy or lease it. High residual value, the price at which the lessee can purchase the car at the end of the lease period, is the single most important factor in leasing. More expensive cars hold their value better so lease payments are relatively less than on lower-end cars. They are typically preferable for leasing, because they will have relatively lower monthly payments. Ironically, this supports the idea that when you lease you can usually “drive more car for less money.”
Of course, current low interest rates benefit all types of borrowing, including car financing. But monthly payments are lower for leasing because the purchase price of the vehicle is reduced by the residual value. When buying a car, each loan financing payment builds equity (buying outright avoids interest costs altogether). Once paid off, the car is owned free and clear to “use up and wear out” as much as possible. In contrast, the most obvious benefit of leasing is trading it in for a new car every few years to avoid the hassle of selling or the worrying about resale value. In the “old days,” cars did not really change too much or too frequently, (the combustion engine is still essentially the same as always) but new gadgets and useful features keep coming. Some lessees may intend to buy their leased vehicle at the end of the term – knowing in advance what the pre-defined cost will be – but the leasing approach keeps their options open to see what new models are like in a few years.
Lessees should know their driving habits because there are usually mileage limits on most leases and other strict conditions like unusual wear-and-tear (which young children might jeopardize) that could favor buying. Typically, it is also not ideal to lease for too long as this could result in maintenance and repair expenses (like new tires or brakes) on a car that is not owned. This is why so many leases match the standard warranty period – typically 3 years or about 36,000 miles. If one plans to be in the same car for longer than that, then buying new or used is probably better. Again, owning a car is still almost always less expensive than leasing over the long run, but leasing can be useful as it provides greater financial and operating flexibility.
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