Consumers looking to drive a new car are confronted with two basic options --- to lease or to buy. One choice is usually preferable to the other, but that depends entirely on personal preference, individual financial circumstances and expected time frame. Leasing covers use of the vehicle and is generally the better option when you plan to replace the car every two or three years with little risk of major repairs. Purchasing a car, by contrast, represents ownership.
Lease vs. Buy
Buyers pay the car's full cost, which usually involves a down payment, state sales tax and interest charges over the life of the loan when financing the purchase. Automobile lessees are responsible for a piece of the vehicle's total value, covering depreciation during the lease's term. Leasing does not require a down payment. Sales taxes are paid monthly and cover the amount of total payments rather than full value, and the process involves no trade-in hassles. Once the lease expires, and if the driven miles are less than the total permitted, drivers have the option of handing in the keys or buying the car for its residual value. Going over the permitted mileage involves an extra per-mile assessment that covers the increased depreciation.
Lower Monthly Payments
Leasing nearly always involves lower monthly payments. For a car that retails for $25,000 with an approximate value of $10,000 after three years, lessees pay the $15,000 difference plus interest charges and fees. Buyers will have to pay the entire cost, and unless they are in a position to pay cash up front, the monthly payments will be higher.
Alternative Investments
Leasing does not involve accumulating equity in the vehicle by paying for its total value over an extended number of years. Lessees simply pay for what they utilize over a fixed time frame, typically 24 to 36 months. While they own nothing upon the contract's expiration, they can use the extra monthly cash toward higher-yielding investments such as bonds, stocks or mutual funds. Consumers on fixed budgets may also prefer to use leasing's increased cash availability to pay a mortgage or basic living expenses.
Long-Term Considerations
Leasing is nearly always the more expensive option over the long term. Buyers who continue driving their cars well after they have been paid off can then drive for no monthly cost beyond repairs. Lessees must continue to pay monthly ad infinitum, but without the nuisances of ownership, repair costs that invariably become higher over time and the bother of having to sell or trade in the car at some future point.
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