Should I Lease or Buy a Car?

A dilemma for several people is determining if they should buy or lease a car. The answer to buying or leasing a car really depends on the individual and the financial position they are in. When you lease a car, you are financing the use of a vehicle. When you buy a car, you are purchasing the vehicle. Both financing options have different benefits and disadvantages. Although buying and leasing will both get you into a new car, there are completely different. For example, a leased vehicle will allow you to get a new car every 2-3 years without worrying about paying any repair costs. When you buy a car, you are responsible for the long-term costs associated with the vehicle.

Buying a car allows you to do whatever you want with the vehicle. It is your car, no matter how many miles you put on the car. Usually when you purchase a car you will make a down payment, pay sales tax, and then negotiate a loan and interest rate to finance the vehicle. The interest rate and loan will be determined on your credit history and your first payment will be due one month after the purchase. When you lease a car, you only pay for a portion of the cost of the vehicle. You are paying for the part of the car that you are using. You will pay sales tax with your monthly payments and you will pay a financial rate or a "money factor" that is similar to the interest rate you would have on a car loan. The first payment will be due upon signing the contract and you can either return the vehicle at the end of the lease or purchase it for its depreciated cost.

Understanding Car Leasing
In order to decide which option is best for you, it is important to understand each financing option. Leasing a car does have its advantages like lower monthly payments, the ability to drive a new car every 2-3 years, less maintenance, and gap coverage.

The monthly payment on a leased vehicle are 30-60% lower than the payments on a purchased vehicle. You are only paying for the portion of the car that you use. To understand how it works, measure out a cup of water, now dump out _ cups of water and the left-over water is essentially the portion of the car you are paying for. Leasing a vehicle allows you all the benefits of owning one, without being responsible for costly repairs or worrying about selling the car later on. Many people prefer leased vehicles because they enjoy driving new cars every other year. Instead of keeping the same car for 10 years, they get to enjoy top-of-the-line cars for lower monthly payments. If something goes wrong with the car, they take it back to the dealer and the repairs are completely covered by the manufacturer's warranty.

Another advantage of leasing a vehicle is the ability to walk away with no down payment. You can choose to put a down payment on the new car, to lower your monthly payments or you can trade-in another vehicle. Since you don't pay sales tax on a leased vehicle, you save additional money. The tax you pay on a vehicle is spread out over the term of your lease instead of paying it all in one lump sum. Most leased vehicles come with gap protection. Gap protection will cover your car if it is totaled in an accident or if it is stolen and you still owe more than the car is actually worth. Even with all the benefits you can enjoy with a leased vehicle, there are some disadvantages.

If you want to end your lease early you will have to pay a termination fee and all the remaining payments. Car leases are designed to discourage you from terminating the lease early. Before you lease a vehicle, you need to make sure you will be able to afford the monthly payments, even if your income decreases. Another downside to a leased vehicle is the amount of miles you can drive. Most leased vehicles can only be driven 10,000-15,000 miles per year, if you go over your limit you will have to pay an excess mileage fee.

Since a leased vehicle doesn't belong to you, you cannot make any modifications to it. If you make any changes, you will be charged for the cost to undo what you have modified. A leased vehicle needs to be returned in good condition, if you "beat up" your cars, you will have to pay for any damage to the car. Maintenance cost, vehicle upkeep, and insurance coverage are required to be fulfilled by the person leasing the vehicle, not the lender.

In order to lease a vehicle, you must have good credit. Since leased cars have lower payments and no down payments, they are much riskier than car loans. If you have a good credit history of paying on time and you don't have excessive debt, you will be able to lease a car. Another disadvantage to leasing a car is that you will always have a monthly car payment. When you take out a loan to purchase a car, you will eventually own the vehicle and you will not have monthly payment obligations. The benefit to a monthly payment is the vehicle warranty and the protection it provides to drivers.

Understanding Car Buying
Several people prefer car buying because it builds equity over time. Car loans are actually considered "good debt" and they generally do not hurt your credit score, as long as you make the monthly payments and eventually pay off your loan. When you buy a car, it is yours; you can do whatever you would like with the vehicle. You can paint it, change the interior, add tinted windows, and accessorize it as you would like. Buying a car also allows you drive it as you please, you will not have mileage limits or other restrictions when it comes to driving the car.

Another benefit to car buying is the manufacturer incentives that are being offered. While you usually have to put a down payment on a vehicle, some lenders will waive the down payment to get you in the car today. Manufacturer incentives can make car buying more affordable. You also have the ability to negotiate with the lender to get a lower interest rate or to reduce the sticker price of the vehicle. The lower the interest rate, the lower your monthly payments will be. Even lower credit scores will allow you purchase a vehicle, depending upon the lender and the sales associate you are working with. Buying a car gives you the ability to sell it at any time, or you can trade it in for another car. Even though cars depreciate in value, you will have a salable asset in the end.

Buying a car does come with some disadvantages. If the vehicle needs repair, it is your responsibility. If the car is covered under warranty, repairs will be paid for until the warranty ends. You will also be responsible for maintenance and upkeep of the vehicle, especially if you want to sell it. When you purchase a vehicle, you will be responsible for the sales tax at the time of purchase.

The second you buy a car and drive it off the lot, it begins to depreciate in value. Cars always get old and unless they become a "collector's car", you will lose money. Buying a car is similar to putting money into a depreciating savings account; this is why cars are generally not considered an investment. Buying a car also means you may have higher monthly payments. Buying a car does pay off in the long run, but the initial payments may be hard for some people to afford.

No matter which financing option you choose, remember that vehicles will depreciate no matter what and you will never get back the money you spend. Even if you sell the vehicle or trade it in, you will still lose money on the car. A portion of every payment made on the vehicle will go toward the declining-value of the car. Leasing or buying a car really depends on the person. If you enjoy driving a new vehicle without the responsibility that comes with owning a car, then it is wise to lease a car. If you want to own the car you drive and keep it for a long time without worrying about the amount of miles you drive, it is better to own. It is important to evaluate your financial situation and determine how much you can afford to spend on monthly car payments. Obtain a copy of your credit report to see how good your credit rating is. If your credit score needs to improve, wait a few months and pay down other debts before you take on a large debt for a vehicle. The higher your credit rating is, the lower your monthly payments will be with both financing options.