When it comes to leasing vs. buying, there is no definite answer on which option is better. It depends on each individual situation and the goals a vehicle buyer pursues when making the purchase. A consumer must consider all aspects of leasing and buying: commitment terms, costs, monthly payments and depreciation of the vehicle.
The Term of Commitment
When considering a new vehicle, a consumer must determine how long he will keep it. If he likes to drive new vehicles and wants to get a new model in a couple of years, leasing may be the best option. Lease terms vary from two to four years, whereas loans can be arranged for up to six years. However, a consumer may have to pay penalties for terminating the lease early. If he has a loan, he can pay it off at any time, and most financial institutions don't charge prepayment or pay-off penalties.
The Costs
A lease and an auto loan have initial costs associated with them, such as down payment and other fees. Most leases require a down payment and a first-month payment at the time of signing. Most lenders don't finance a full value of the vehicle, and consumer may need to pay the difference out of pocket. Consumers must pay taxes and license fees when they purchase a vehicle. While the initial costs may be about the same for both, unlike loans, leases have end-of-the-term charges, which may include extra mileage and excessive wear.
Monthly Payments
Leasing is similar to a long-term car rental. The lessor pays a low monthly payment, which covers the car's expected depreciation, plus charges, such as taxes and fees. Loan payments include principal, interest and may include other charges, such as credit insurance and late-payment fees. Loan payments depend on the loan amount, the term and the interest rate, which makes them higher than lease payments.
Vehicle Depreciation
A lessor has an option to purchase the vehicle at the end of the lease term. In many cases, the price is too high because the vehicle has depreciated. Depreciation depends on several factors, such as popularity of make and model, the cost of maintenance and how much the vehicle has been in use. Some vehicles depreciate faster than others. If a lessor is considering buying the vehicle at the end of the term, he needs to calculate the depreciated value of it and compare it with the purchase price.
Unlike leases, depreciation usually doesn't play a big role when it comes to loans. For newer used vehicles, loan payments will be ahead of depreciation. With new vehicles, the owner may be "upside down" on the loan if he sells the car within the first 12 to 18 months of the loan. New vehicles depreciate as much as 20 percent as soon as they leave the dealer's lot. If a consumer plans to keep the vehicle only a couple of years, a short lease may be a better option.
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