When to Buy, When to Lease

By David Colville, EasyCare National Director of OEM Accounts

You’ve decided you want a new car. Should you obtain a loan, lease or pay cash? There are pros and cons for all three methods. You can make an informed choice about what’s best for you based on the initial cash outlay, money and operating costs, equity and ownership and tax and insurance considerations.

Paying in Cash

Only about 10% of all automobile purchases are in cash. If you pay for the entire cost of your car with cash up front, it’s all yours and you don’t owe anyone anything. However, you also don’t have that money available for investing, for other uses or in case of an emergency.

Initial Costs

Leasing almost always has one very powerful advantage over a loan… lower initial cash outlay.  Typically, a lease will require you to provide the first payment and a refundable security deposit. A “capitalized cost reduction” can be utilized to reduce your monthly payment if needed.

When you finance, you will typically make a down payment when you take delivery of the vehicle and make your first payment 30 to 45 days after you sign your contract.

Continuing Costs

When deciding whether to lease or to buy, continuing costs are another factor that should be considered. Continuing costs are all those costs which are incurred after the initial costs and before the end of the loan or lease costs. Although the monthly payment is usually the biggest portion of the continuing expense, it isn’t the only item you should consider. Taxes, insurance, repairs, maintenance, and operating costs are all continuing expenses whether you buy or lease.

Equity and Ownership

When you lease, you pay for only a portion of a vehicle’s cost, which is the part you will use during the lease term. At the end of the lease, you will have no equity or ownership of the vehicle. At the end of the lease, you may return the vehicle, or purchase it for its depreciated value. When you buy a car with a loan, you pay for the entire cost of the vehicle. You are gradually building equity as you pay it off. However, you should consider the amount of money that you will you spend over the entire period of the loan in order to acquire the vehicle. Even though you will “own” the car after making all the loan payments, in all likelihood the value of the vehicle will be worth far less than the amount that was spent to own it. And even though it is an “asset,” it is and will remain a depreciating one, losing more and more of its value with each day. At the end of the loan, you may keep driving the car, or choose to sell or trade the vehicle in for its depreciated value.

Taxes and Insurance

When you buy a car in most states you pay the sales tax in an up-front sum. With leasing, you generally amortize the sales or “use tax” over the term of the lease.
Leasing frequently requires higher limits for insurance coverage, for both liability and collision and comprehensive. Leasing may also require that you carry a lower deductible.

So, Which is Better?

It all depends on what is most important to you.
You should strongly consider buying your vehicle if you plan to drive your vehicle for years to spread out the cost, don’t mind higher monthly payments, want to build up trade-in or resale value, and/or like the idea of having “ownership”.

You should strongly consider leasing your vehicle if you value driving a new car every two or three years, want a lower monthly payment, are not concerned about building equity, are able to predict the number of miles you drive yearly, will properly maintain your vehicles and would be willing to pay slightly more if you should decide to buy the vehicle at the end of the lease.

Back to Driving Economically

Prior to joining APCO, David Colville provided finance and lease training and consulting on National level for clients such as Lexus, Mercedes Benz, Volkswagen, Toyota, Nissan, BMW and numerous individual Dealerships, domestic and import. David holds CVLE certification from the National Vehicle Leasing Association through Northwood University.