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Lease or Buy: Understanding the Basics

As leasing continues to grow in popularity, many new car buyers wonder how the option of leasing compares to buying. Let’s look at a hypothetical couple, Peggy and Stan, who have always purchased their vehicles. After hearing friends and relatives tout the benefits of leasing, they now wonder whether it is better to lease or buy.

As Stan and Peggy begin to look into the leasing process, understanding the details seems overwhelming. But, as they soon discover, the basics are pretty simple. If they purchase a vehicle, they own it. If they lease a vehicle, they pay to use it, usually for two to three years, and then return the car at the end of the contract.

Pros and Cons of Leasing

One of the main advantages of leasing is that it generally allows Stan and Peggy to get more “vehicle” for the money. Since they are only paying a portion of the total value, they can expect to make a smaller monthly payment for a given vehicle or drive a more expensive make or model for a given monthly payment. Suppose, for example, they are considering purchasing a mid-size sedan. For the same monthly payment, they may be able to lease a high-end luxury sedan. Alternatively, if they prefer the mid-size model, they may be able to pay less per month with a lease than if they purchased it.

Yet, leasing is not for everyone, and there are tradeoffs to consider. Leases include many charges that may require large sums of cash at the beginning and end of the lease. Up-front costs may include a security deposit, a destination fee, and a registration fee. Lease-end charges may be assessed for “excessive wear and tear,” excess mileage (which may be up to $.25 or more per mile), and a disposition fee. If Stan and Peggy were to end the lease early, they may be expected to pay a high penalty. In addition, if they decided to purchase the car at the end of the lease, it may cost more than if they had originally purchased and financed it.

When Buying Is a Better Option

Buying may be a better choice if Stan and Peggy plan to keep the vehicle for a long time. Usually, if the financing costs over the life of a car loan are tallied and compared to the costs of leasing and then purchasing the leased vehicle, buying makes more economic sense. Also, once Stan and Peggy own the car, they are free to drive it for years without a car payment, pass it on to a family member, or sell it. They may also maintain the vehicle as they wish, modify or customize it in any way they choose, and put unlimited miles on it without penalty.

Now that Stan and Peggy understand the basics, they are in a better position to decide between leasing and buying. They can weigh the pros and cons carefully, taking into account both their short- and long-term objectives, as well as their driving habits. Though the lease process may at first seem daunting, understanding their options can help them get the best new car deal for their circumstances.

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