Monday, December 07, 2009

Should I lease or buy my next car?

Unfortunately, as with most things, there is no simple answer to this question. However, it is important that you evaluate both options because one or the other usually will have a significant cost advantage.

The most important factor in deciding between a lease and a purchase is the vehicle you choose. If you are buying a used vehicle, you can pretty much rule out a lease as a viable alternative. The reason for this is that banks and other leasing institutions do not offer favorable money factors or residuals on used cars. This translates into you paying more for the lease. Ironically, residuals should be relatively higher for used cars. The residual is the percentage of the depreciated value of the car remaining at the end of the lease. A used car experiences the largest portion of its depreciation when it is driven off the showroom floor. But banks and leasing institutions are leery of used cars because they have to rely too heavily on the dealer for their true condition and most used cars have no new car warranty remaining.

If you are buying a new car, the most attractive leases will usually be with makes and models having the highest resale values. You can check this by comparing the cost of the new car with the wholesale value of a 2, 3, or 4 year old model. A good Web site for this is, the Web site for Kelly Bluebook. This is how the banks and other leasing companies calculate their residuals. The makes with the higher residuals and resale values are your more popular makes, those that don’t employ excessive rebates and incentives, and those that don’t sell large numbers of cars to rental and leasing companies. Generally speaking, these are mostly your Japanese makes, some European, and even some domestic cars that are in high-demand and low supply like the Chevrolet Corvette or Pontiac Solstice.

If you decide to purchase a new car that has a high resale value which makes it makes it a good candidate for leasing, be sure that you get lease quotes from several banks and/or leasing companies. The money factor (equivalent of the interest rate in a purchase) and residuals will vary. You should shop your financing if you are buying and shop your lease rates/residuals if you are leasing.

Many people think there is a “tax advantage” to leasing. This is not true. You can deduct only that portion of the usage of a car that is for business whether you lease or buy. For a lease that represents part of the lease payment and for a purchase that represents part of the depreciation.

Here are some things to be careful of if you lease: (1) Your insurance cost will be considerably higher. (2) Do not opt for a lease term beyond the time you want to drive the car. You may be tempted by lower payments on lease terms from 60 to 72 months, but don’t do this! You are obligated to pay the leasing company for many more months than you want to keep the car and you will have to pay a very large sum of money to get out of the lease early. (3) Never allow a dealer to switch you from a purchase to a lease at the last minute simply because they offer you a lower payment. This is common tactic to raise the profit on the transaction. Remember, at the end of the lease you own nothing, but after the last payment of a purchase, you own the car so naturally, your lease payment will be lower than a purchase payment. (4) Be sure you understand how many miles per year you will be allowed in your lease without a charge per mile. Most leases are for 12,000 miles per year. If you drive more miles per year, you could be confronted with a very large surprise charge at your lease termination. (5) When you sign your lease, there will be a “fee” commonly labeled a “lease acquisition fee”. Part of this fee goes to the leasing company but part may go to the dealer and is negotiable. Ask him to waive his portion of the lease acquisition fee because it is part his profit on the lease.

The cost of a car is total cost of the car during the time you drove it. If you lease, that is the sum of the payments. If you buy it, it is the total cost of the depreciation plus interest. Of course you have extraneous costs like maintenance, insurance, repairs, and fuel, but (except for insurance), these are the same for a lease and purchase. Too many people look only at the purchase price of the car. A higher priced car with a higher resale or residual value can actually cost you less than the lower priced car.


  1. Hi Earl,

    This was a really good piece. Thanks for the insight on leasing or buying a vehicle.

    We lease a vehicle for many reasons, one of them is having a fixed car expense every month.

    But we were concerned that we would get hit up by some additional repair costs that weren't covered by the manufacturer. So we purchased DriverCare from the dealer. (I believe it's from EasyCare). It covers tires and wheels, so if we run over something - like metal or glass - our tires are covered.

    It might be something other folks leasing cars should consider.

  2. Thanks for your posting, Rachelle.

    I'm not familiar with the specific plan you named that you bought that reimburses you for road hazzards to your wheels and tires.

    But road hazzard insurance is something most dealers offer. Like any other product or service, one needs to evaluate the price vs. the benefit.

    I see a lot of tires and wheels damaged by road hazzards here in south Florida due to the large amount of road construction. We have customers coming in daily with damaged tires and/or wheels.


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