Should I Buy or Lease a Car?

“Should I buy or lease a car?” It’s a question many shoppers consider in showrooms across the country. There are reasons people choose to buy or lease that have more to do with the heart than the checkbook. Buyers may enjoy pride in ownership, for instance, just as lessees may savor the chance to drive home shiny new objects every few years. In fact, about 30 percent of all new vehicles in the U.S. were leased during the first nine months of 2016, according to Experian. But here’s why you should take emotion out of the picture and consider worthwhile financial factors.

Consider Your Mileage

It’s helpful to think of leasing as a long-term rental technique for which you pay monthly installments based on an interest rate and depreciation of the car’s value. Monthly lease payments are often lower than loan payments would be for the same car, which makes leasing an attractive alternative if you’re tight on cash or you simply want to drive a nicer vehicle than you could otherwise afford.

Different variables can flip the equation, however. You may find that auto loan payments are lower than lease ones if you have a large down payment and are well rewarded for a trade-in, for instance. Your anticipated mileage can also affect your monthly payments. Auto leases often have mileage restrictions. If you think you’ll exceed those caps — 12,000 miles per year is common, according to LeaseGuide.com — you may choose to pay more in monthly payments for a higher mileage limit than pay penalties for excess mileage when you return the car. Online calculators, like those from KeyBank and Allstate, can help you better assess the cost comparisons.

Consider How Long You Want the Car

Buying is often the best financial choice if you intend to keep a car for a long time. Yes, the vehicle depreciates in value, but it’s yours once you pay it off, and you can one day sell it or use it to help you buy your next car. Lease and you have no equity unless you opt to purchase the vehicle after your lease agreement ends. But what if you want to part before your lease term is up? It could get costly. You might be required to make the remaining lease payments and pay penalties. One consolation is that if your lease is transferable, you may be able to transfer it to someone through an online lease-swapping marketplace.

There are other long-term issues to consider. Cars with three-year leases generally stay under the manufacturer’s warranty, so aside from routine maintenance like oil changes and tire rotations, you likely won’t have to pay for major repairs during your lease term. Of course, if you don’t keep up your leased car’s regular maintenance, or if you return it with more than just normal wear and tear, you can expect to pay penalties at the end of your lease term.

Consider Taxes and Insurance

Taxes can have an impact on your buy vs. lease decision, and states have different rules. According to LeaseGuide.com, while most states only charge sales tax on monthly lease payments and a down payment, some states require the entire sales tax to be paid up front. The amount could be based on the sum of the lease payments or the full sale price of the car. Additionally, the vehicle leasing company may require you to get higher insurance coverage than you’d normally choose if you were to purchase the car.

Leasing and buying at least have one thing in common: You can negotiate in both scenarios. That means it pays to do your homework about leasing terms like capitalized cost, which, as you’ll learn, is a fancy way to describe the leased car’s price. By comparing costs, you can determine whether leasing or buying a car is the best bet for you.

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