When considering your options between buying or leasing a new car, there are many factors to evaluate. Admittedly, there are pros and cons on both sides of the debate. Therefore, perhaps the easiest way to come to the right decision for your family and your current financial state is simply to look at the facts, both on the plus and minus side, for leasing versus buying a vehicle.
What It Means to Lease a Vehicle?
It’s likely safe to assume that almost everyone understands what it means to buy a vehicle. Of course, it requires (typically) you to finance the vehicle and make monthly payments. However, not everyone is as familiar with the lease option. In many ways, leasing a vehicle is much like renting a car but for an extended time. It’s usually less expensive monthly when compared to buying outright. In many cases, you will be required to pay a down payment on a leased vehicle at the time of the leasing agreement.
Your lease agreement will usually be the amount of the depreciation along with interest and fees divided over equal monthly payments. In other words, it’s the capitalized cost minus the residual value plus the money factor and fees (all terms described below). It is a pretty complex financial agreement that comes with its own vocabulary that you need to understand if you want to move forward with this option. They are as follows:
- Capitalized Cost: This is the cap cost for the vehicle or the price of the car. You can negotiate the cost of a leased vehicle just as you can one you purchase to get this amount as low as possible. Most automotive-sponsored lease deals, though, have this cost price fixed.
- Residual Value: This is the expected value of the vehicle at the end of your lease term, as deemed by an expert’s opinion. Obviously, it’s better to have a residual higher than the cap cost. Otherwise, you, as the lessor, will have to pay a higher portion of the capitalized costs.
- Money Factor: This is another term used when leasing a vehicle. It is the interest rate that goes into your leasing contract. To convert the money factor number into a more traditional interest rate, multiply that amount by 2,400.
Taxes and Leasing
It’s important to understand the effects of your taxes when leasing a vehicle. In most cases, when you lease a vehicle, you pay sales tax only on the portion of the vehicle’s value that you are using during the lease term. Because of this, you usually won’t pay taxes on the full value of the vehicle. However, this can vary by location. In some states, taxes may be assessed on the entire vehicle value at the time of the lease, or they might be included in the monthly lease payments. Additionally, if you decide to purchase the vehicle at the end of the lease, you may be subject to sales tax on the residual value.
For business owners, leasing can offer potential tax benefits. Lease payments are often considered a business expense and may be deducted from your taxable income, reducing your overall tax liability. Keeping accurate tax documents is essential for verifying these deductions. However, it’s important to consult a tax professional to understand how the rules apply to your specific situation.
Pros of Leasing
While the overall agreement for leasing might be a bit confusing, it’s not hard to understand once you get all the nuances of the agreement down. The following are some pros indicating why you might want to opt for a lease instead of buying a vehicle:
- Can Get Higher-End Vehicles: One significant benefit of leasing cars is that it allows you to drive and enjoy a higher-end vehicle without as much of a monthly and long-term investment. Also, since leases are usually only two to three-year agreements, this gives you the ability to upgrade your ride more frequently than if you were buying the car outright.
- Less Expensive to Maintain: Another benefit, along with the potential to get into a nicer car than you could otherwise obtain, is the fact that lower payments, along with warranties and free routine maintenance throughout the lease, means that your overall cost of ownership (well you won’t own it) will be much more affordable than a traditional arrangement.
- You Have the Option of Buying: At the end of your lease agreement, if you are in love with your ride and want to— at that time— purchase the vehicle, you do have that option. The cost of the vehicle at that time will often be the car’s residual value in addition to the manufacturer’s processing fees. Therefore, in some cases, depending on your driving habits and such, you can sometimes obtain a nice car for less than its current market value.
Cons of Leasing a Vehicle
The following are some points on the other side of things. After all, you need to know both sides to make an educated decision on which is best for you, leasing or buying:
- You Don’t Own The Car: Perhaps the most obvious drawback of leasing is that you don’t own the car you are leasing. It is never yours, so at the end of the agreement, you do not have a trade-in available to go towards your next vehicle purchase. Even if you do eventually purchase the vehicle you are leasing after your agreement ends, you could be paying more for it than you would have to purchase it outright from the beginning once all the fees and such are added to the cost.
- It Can be Risky: If you ever have to break an auto lease for some reason, you will usually face a hefty penalty. When comparing this situation with a traditional purchase, you are not penalized (usually) for paying off your vehicle early (as part of selling it) or moving payments into another buyer’s name if you find yourself in over your head financially. In addition, as mentioned above, sometimes, with the fees and all overtime, leasing and then buying can be more expensive than just buying from the beginning.
- Restricted Number of Miles: Another immensely important factor to consider when determining if leasing is for you is how many miles you usually drive. Leased cars have restrictions on how many miles they can be driven without incurring a penalty. Usually, this is between 12,000 and 15,000 miles. If you drive a lot of miles, leasing might simply just not be wise for you because you will be penalized for driving more than the standard predetermined amount.
- Can Increase Insurance Premiums: The cost of a vehicle isn’t only the purchase cost or the monthly payment or lease amount; it’s also the cost of car insurance. Unfortunately, when you lease, you have fewer options in terms of insurance, as you have to keep full coverage on the vehicle (since you don’t own it). This level of coverage usually requires full comprehensive and collision coverage, which can get pricey.
It’s Up To You, Your Financial State, and Your Habits
Hopefully, the information outlined above will help guide you in your decision-making and allow you to determine if leasing or buying is the better option for you. There are also many benefits and drawbacks to buying outright, but since that is the more well-known transaction, focusing on leasing and the good and bad of it seemed like the most helpful way to guide your choice between the two options.
Of course, more than anything else, the option that works best for you will be based on your current financial health, your long-term financial goals, and if you can afford to buy a car outright without making payments. This, along with considering how many miles you typically drive, will help you move towards one option over the other.
