Leasing a Car vs Purchasing a Car

Leasing a car is an effective way to consistently drive a new vehicle at a predictable cost and with no risk of lost value through depreciation. Buying a car is cheaper in the long run, plus you have some residual value when you get another vehicle. Both options have advantages, but which is right for you: buying a car or leasing a car?

Short Term: Leasing Is Cheaper

Assuming the choice is between leasing a car and buying the same car with similar terms such as comparable interest rates, payout periods and down payments, your lease payments should be between 30 percent and 60 percent lower than a car payment in the first three years.

With a car, you are paying up front or borrowing up front the entire price of the car less down payment. With a less you are only paying over 36 months for the use of that much of the car's life. In effect, you only pay for the depreciation plus interest and fees when you lease.

Mid-Term: It's a Wash

At the end of the lease period - say 36 months - if you return a leased car and someone who had bought a car sold their car, your cost of having the vehicles will have been about the same. Again, assuming the initial terms were similar.

At this point, the advantage of owning begins to kick in because of the residual value. When leasing a car, you pay for what you use as you use it and turn the car back to the owner. When buying, you can sell your car. The degree to which leasing or buying will be better at this point can depend on the market value of your car and how well you have maintained it.

Long Term: Buying Is Less Expensive

If you hold onto a purchased car, each year the cost advantage over leasing a car goes up because your cost of ownership goes down as the loan is paid off. You must factor in maintenance on an older vehicle and decreasing residual value, but nine years in a car with six years of drive time after a loan is paid off will be cheaper than three three-year lease periods.

Which Is Better?

To determine whether leasing or buying is better for you, begin with your goals and your personal financial circumstances.

Is cash on hand a problem and cash flow in good shape? Leasing a car offers a cheaper way into a car with lower costs of operation in the first three years. Is it important to drive a new car? Leasing is a lower-cost method of always staying in a new car. Is saving money over time and having the lowest cost of ownership important? Consider buying. You will save money in the long run. Is flexibility important? Leases are restrictive. You can only drive so many miles per year without financial penalty and there are costs to getting out of a lease in the form of an early termination fee.

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