Benefits and disadvantages apply to cash purchases and vehicle lease options. During a lease, the bank is the vehicle's owner, requires specific insurance coverage and limits your vehicle's mileage allowance and wear and tear. Paying cash, on the other hand, allows you to insure, drive and sell your vehicle as you please.
Insurance Requirements
If you pay cash for a car, you can reduce or change your insurance coverage without penalty. If you lease a car, you must purchase full-coverage insurance. Leasing banks also limit deductible options, usually to around $500. Most insurance companies, however, offer deductible options up to $1,000 or more. Lease contracts also require gap insurance, which covers the bank's loss if your vehicle becomes a total loss. Gap insurance prices range from $95 to more than $600 at the time of publication. Gap insurance is paid at the start of your lease term as a one-time fee.
Future Market Value
Leasing banks assume the car's future market value risk, calculated as the lease residual value, while you assume risk for the future value of the car if you pay cash. At the beginning of your lease, the bank calculates the car's future value based on a percentage of the car's manufacturer's suggested retail price. The residual value is your purchase price for a lease-end buyout and the amount the bank prices the vehicle at for resale. If the bank guessed the residual value wrong, it assumes the loss. If you pay cash and the car's value significantly drops because of market conditions, you'll lose money if you resell or trade the vehicle toward another purchase in the future.
Savings
If you can put the cash you'd pay for your car into an interest-bearing savings account during the term of the lease, you might lose potential profit by paying cash. Because you'll only pay for about half of the car's price during the lease term, your money might earn more interest while you make monthly payments. Check current savings rates and compare the amount of interest you'd earn to the interest you'd pay during your lease term. Ask a dealer for the lease's interest rate, known as the money factor.
Considerations
If you purchase the vehicle at the end of the lease term, you'll likely spend thousands more than a cash purchase unless you negotiate the price of the vehicle before leasing. Leasing customers often focus on monthly payments rather than vehicle cost. Rebates and discounts don't usually apply to leases, meaning the lease is based on MSRP. If you think you might purchase the car at the end of the lease term, compare current purchase discounts to total lease cost and buyout amount to decide which option offers the most savings. If you exceed your wear-and-tear or mileage allowance during the term of the lease, you'll also pay penalty fees when you return the leased car.
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