Should I Lease?

     Among todays high-end luxury, exotic, and sports cars leasing has become a very popular option. Based on your individual situation and taste you must decide which arrangement suits you best. Leasing is not all that different than buying with a loan, in which case the bank holds the title and you don't own your car until the loan is paid off. It's just that, when buying, you build up equity because of your higher monthly payments and, when leasing you don't. So, what are the potential benefits of leasing when compared to conventional new-car purchase loans?

Lower Monthly Payments
     Because you're only paying for the portion of the vehicle that you actually use, your monthly payments are 30%-60% lower than financing a loan of the same term.

Lower Up front Cash Outlay
     Most leases require little or no down payment, which makes getting into a new car more affordable, however, you can choose to make a down payment to lower your monthly payment amount.

More Car, More Often
     Since your monthly payments are lower, you'll be able to get more car for the same money and drive a brand new vehicle every two to four years, depending on the term length of your leases.

Fewer Maintenance Issues
     Many people choose to lease for a term length equal to that of the manufacturer's warranty coverage so that if something major goes wrong with their car, it's always covered.

Lower Tax Bite
     In most states and in Canada, you don't pay sales tax on the entire value of a vehicle when you lease. You're only taxed on the portion of the value that you use during your lease. The tax is spread out and paid along with your monthly lease payment.

No Used-Car Hassles
     If you want to make sure you get a good deal selling a used car can be a hassle. With leasing however, when your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy it or trade it.

Now that you know the benefits of leasing over buying, let's see which arrangement is best suited for your lifestyle.

Who Should Lease?

     Although leasing does have advantages over buying it is not the best choice in all situations. Consider the questions below before making a decision. If you answer "yes" to any of the questions leasing may not be right for you.

Do you think there is a chance you'll want to end the lease?

     Lease contracts are purposely written to discourage early termination. To do so usually means you'll pay termination charges and all remaining payments. Wanting or needing to end a lease early is the most common problem people have with leasing.

Do you typically drive your cars more than 15,000 miles a year?

     Lease contracts limit the number of miles you can drive each year. If you exceed your limit, you're subject to "excess mileage" charges at the end of the lease. Sometimes additional miles can be bought up front at the time you sign your lease at a lower cost if you anticipate exceeding the mileage limit.

Do you think you'll want to customize your car, make modifications, or repaint it?

     Obviously this is a no-brainer. If you want to make significant modifications you should just buy it.

Do you drive "fad" cars or cars that frequently change style?

     These types of cars usually lose resale value quickly, which means their lease "residual" value is lower. Low residual value translates into higher monthly lease payments. This kind of car could easily have a higher monthly lease payment than a more expensive car with a better resale history.

Is your credit less than Perfect?

     Because leases typically require a smaller down payment and lower monthly payments, you generally must have a better credit rating than would be required for a loan because of the higher risk to the lease provider. If you have a consistent payment history and no excessive debt load you should have no problem. If not you will be subject to higher interest rates or may even be declined.

Lease vs buy

     Leases and purchase loans are two very different methods of automobile financing. Each has it's own benefits and disadvantages. Let's look how buying and leasing are different. When you buy, you pay for the cost of the entire vehicle. When you lease, you pay for only the portion of the vehicle's "use up" during the time you're driving it.

     For example, if you lease a car that costs $400,000, but is worth only $270,000 after 12 months, you pay for the $130,000 difference (this is called depreciation), plus finance charges. When you buy, you pay the entire $400,000, plus finance charges. This is basically why leasing offers much lower monthly payments than buying.

     Lease payments are made up of two parts: a depreciation charge and a finance charge. The payment compensates the leasing company for loss in value of its asset, as well as interest on the total amount of money they have invested in the car while you're driving it.

     Loan payments also have two parts: a principal charge and a finance charge. The principal charge pays off the vehicle's full purchase price, while the finance charge is interest. However, since all vehicles depreciate in value by the same amount regardless of whether they are bought or leased, part of the loan principal payment should be considered as a depreciation charge, just like with leasing, it's money you never get back, even if you sell the vehicle later on.

So, which is better, lease or buy?

     It depends on what's most important to you. If you want lower monthly costs and like a driving a new car every two or three years, but are willing to pay more in the long run to get those benefits, then lease. If you want to be able to pay off your vehicle and be payment-free for a while, but are willing to make higher payments for four or five years then you should buy.

     One final note that is outside the scope of the purchase or lease agreement is how you are utilizing your money otherwise. With leasing, you have the option of putting your monthly payment savings into more productive investments that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing.