Ah, the age-old question: Should you lease your next automobile or buy it instead? Conventional wisdom once told us leasing wasn’t a great idea because at the end of the lease term, you’d have nothing to show for all the money you’d spent. But as cars have gotten more expensive, leasing has become a popular way to get relatively low monthly payments on a new vehicle without putting down a lot of cash.
So what’s the right solution for you? Let’s take a look at some of the pros and cons of leasing and buying, then we’ll talk about what type of owner you might be to help guide your decision. And last but not least, we’ll go through a couple of key concepts—what money factor is, and why down payments are two totally different things in leasing versus buying.
Should you buy or lease? Let’s find out!
What Are the Pros and Cons of Buying vs. Leasing?
[+] You own the vehicle and can keep it forever.
[+] Your payments build equity in the vehicle that you can use to help pay for your next car.
[+] Getting an automotive loan may be easier than qualifying for a lease, especially if you don’t have great credit.
[+] When it’s paid off, your monthly payments go away.
[+] If you have the funds to pay cash for your new wheels, you can automatically save money by avoiding interest (buying) or money factor (leasing).
[+] There aren’t any penalties for excess wear and tear since you own the vehicle.
[+] You’re free to accessorize, customize and otherwise trick out your ride to your heart’s content.
[-] Your monthly payments will probably be higher than leasing a comparable vehicle.
[-] Your down payment might be expensive.
[-] The sales tax will be higher than leasing because you have to pay all the taxes that go along with purchasing the whole vehicle.
[-] You are responsible for selling or trading the vehicle when you are finished with it, and you might not get the price you want.
[-] You might have to accept a long (7-8 year) loan term to afford the monthly payments, which means you could still be paying for the car after you already want a new one. Don’t fall into the upside-down trap!
[-] Depreciation is your problem when it’s time to resell.
[+] Most convenient option for people who like to have a new vehicle every few years.
[+] Your upfront costs including down payment and taxes should be lower than buying.
[+] With a lease, in most states, you only pay tax on the portion of the car’s value you’re using, not the entire purchase price.
[+] Your monthly payments will probably be lower than buying a comparable vehicle since you’re only paying for the value of the vehicle during the lease term (not the whole thing).
[+] Run-of-the-mill vehicles with high resale value such as sedans and compact SUVs often lease at competitive rates and if you’re not too choosey, national lease deals can be an attractive option.
[+] You don’t need to sell or trade the vehicle when your lease term ends – just have it inspected by the manufacturer’s agent and turn it in to a dealer!
[+] Depreciation doesn’t impact you since you don’t own it, and the lease vehicle’s residual value is predetermined by the manufacturer.
[-] You may not qualify for a lease if your credit isn’t very good.
[-] Mileage allowances limit how much you can use the vehicle and overages can be expensive, making it important to accurately estimate your usage before you sign.
[-] Customizing or modifying a leased vehicle isn’t a great idea because you’ll have to restore the original condition before you return it and hope there’s not any damage.
[-] You’re locked into a contract and if you need to terminate the lease early, exiting will be punitively expensive, as in the full cost of your remaining payments.
[-] You may have to pay penalties for excess wear and tear if you don’t take good care of the vehicle.
[-] You will need to carry Gap insurance (built into the price of the lease payment) to make up the difference between the vehicle value and your remaining lease payments in case your leased vehicle is badly damaged in an accident.
Which Type of Automobile Owner Are You?
If you drive more than 15,000 miles per year or it’s impossible to predict how much you will need to drive, buying could make the most sense. The most common lease term is 36 months and 45,000 miles. Although high mileage leases can be written, the terms might not be very favorable, and overages can get spendy fast.
If you’re all about the cutting edge, and you’re thinking about if you should buy or lease, leasing is the way to go. These days, trims and technology packages change fast and leasing is the easiest solution to get a refresh every few years. You’ll never have to get bored with your wheels and won’t be stuck with outdated gadgets and safety features.
If you have ample cash to purchase the vehicle outright, you might want to buy. This one’s pretty straightforward. When you buy with cash, you automatically save money because you don’t have to pay interest (buying) or money factor (leasing) to anyone, and there’s one less place to get taken advantage of in the deal process.
If you’re a first-time car shopper with good credit, leasing may be appealing. You won’t have to spend nearly as much money up front on a lease since you can put as little as 0% down and the taxes are lower. Your relatively low monthly payments will help with affordability. What’s more, some of the most popular compact SUVs and sedans lease attractively because of their high residual values. But remember, you’re in it for the full term of the lease.
If your credit score isn’t very good, you are more likely to qualify for financing than leasing. Many lenders compete in the purchase finance space whereas most lease financing is provided by the vehicle manufacturer’s financing arm (sometimes referred to as the “captive lender”). The larger number of options for purchase financing can be a lifeline if you’ve made some credit mistakes in the past, but buyer beware: The sub-prime financing market can be predatory and your rate will be higher than a person with better credit would have to pay.
If you have negative equity in your current car, leasing your next vehicle could be a savvy decision. Rather than rolling your negative equity into another loan, you can instead roll that negative equity into a lease, and after the term length (i.e. 36 months) you will have no more negative equity (you will have paid it off). Whereas if you finance another purchase you could very well end up even more underwater down the line.
Interest Rate vs. Money Factor
Most people are familiar with the concept of interest rates, but money factors … not so much. When it comes to deciding if you should buy or lease your next vehicle, you need to understand what money factors are, and the truth is, they’re more-or-less the same thing – money on top of the automobile price that you must pay for the privilege of financing the deal.
In purchasing, we talk about interest rates, and in leasing, money factors.
Interest rate divided by 2,400 = money factor
Money factor multiplied by 2,400 = interest rate
So for example, an interest rate of 3 percent is equivalent to a money factor of .00125. Here is a calculator you can use.
When you consider leasing a vehicle ask the dealer for the money factor associated with the lease. Don’t settle for simply looking at the monthly payment, instead ask to view the money factor! Dealers make money by marking up the money factor in lease deals, and it is important you take a look at what money factor you’ll be paying if you decide to move forward with a lease.
For purchase deals, the down payment amount can be a useful tool to get to a monthly payment number that works well with your cash flow. Moreover, making a healthy down payment like 20 percent may get you access to better financing options and can help avoid the perils of going upside down on your loan, where depreciation outpaces your equity. You really don’t want to go upside down as it can make it very expensive if not financially impossible for you to sell the vehicle when you want to. When you buy an automobile, your down payment amount is the initial equity you have in the vehicle and as such may be a justifiable use of the money.
We recommend putting down 0% on a lease if you can. That’s because a lease down payment is nothing more than an advance payment of what would otherwise be rolled into your monthly nut for the lease. Remember, it’s a lease and you’re not buying any equity in the vehicle with that down payment. So why pay the money upfront? All that does is give someone else more of your cash instead of keeping it for yourself a little longer. The other thing is, if you’re in an accident and the vehicle is totaled, your lease down payment will not be refunded. Ouch!
Should You Buy or Lease?
As you can see, determining whether you should buy or lease your next vehicle takes a lot of consideration. Our hope is that by reading this article you have a better sense of what you should think about when contemplating your next automobile.