Hello AutoShopin Community:
One of the most confusing aspects of getting a new car is how you are going to pay for it. Basically, you have three options: Option 1) Purchase the vehicle by taking out a car loan (finance), Option 2) Lease the vehicle and Option 3) Buy cash.
In this blog post, I am going to cover Cash vs. Lease options.
Buying a car outright and paying for it with cash is both powerful and satisfying move. You will be free of monthly payments and can avoid high-interest rates specialty if your credit is not that good. You may also sell your car anytime you wish without worrying about the end-of-lease fees and car loan payoff fees.
The Advantages to Leasing a Vehicle
- Limited Liability: You only pay for the part of the vehicle that you use.
- Tax Savings: You only pay tax on your payment, not the full purchase price of the car.
- Business Write-Off: Most businesses can write off up to 80% of the lease payment where as on a purchase there are much lower percentages that can be written off and must be amortized over a 60-month period usually with the greatest allowed percentage being limited to the very first year of the purchase.
- Fewer Maintenance Costs: Most lease terms span about the same time that the manufacturer’s warranty lasts so usually any major service or maintenance that is needed will be covered under vehicle warranty, leaving you with less out-of-pocket expenses.
- Built-in Gap Coverage: All leases call for a higher level of insurance coverage which automatically includes full payoff of the vehicle in the case of a total loss or theft.
- Easier Credit Approval: Generally, with a lower monthly payment combined with the fact that you are asking the finance company for a lower loan amount to be approved for on a lease, you may find that getting approved for a lease may be easier than a purchase where you would be asking for a loan on the entire purchase price of the vehicle.
- Vehicle Discount Packages: Some manufacturer package savings discounts that show up on the window sticker can be added to the initial value of the vehicle, therefore, will raise the ending residual value, which in turn lowers your monthly payment. You may find that a slightly more expensive vehicle with more options may actually be a cheaper payment than the base model, which is nice.
- Inflated Residuals: Most automobile manufacturers realize that if someone leases one of their cars, they have a much higher chance of that customer coming back in 2 – 3 years and leasing or purchasing another vehicle from them so for that reason most car brands will “push the envelope” a little bit and increase the residual value beyond what is realistic in order to make the lease more attractive to buyers.
- Lower Down Payment: Generally, for you to have a manageable payment on a purchase you would need to put approximately 20% – 25% down where as on a lease you may find that you need to put less money out-of-pocket to get the payment where you need it.
- Security Deposit: Most leases have a security deposit that is required in the beginning, this fee can usually be waived after the buyer’s first lease, helping to lower upfront costs for future lease agreements depending on the manufacturer.
- New Car Every 2 – 4 Years: Yes, it is nice to get a new car every few years instead of driving the same vehicle for 5 – 10 years.
- Often overlooked, leasing a car can improve your credit score if you make your monthly payments on time.
future value of the used car markets is unknown.
- Another advantage for leasing especially for those who plan to buy a home, your debt obligations will be lower than if you finance a car. When you lease your car, you owe the partial amount of the car ‘s value.
- Immune to the used market fluctuations. The future value of a used car is unknown and depends on supply and demand for used cars, as a result, prices can fluctuate. However, when returning a leased vehicle back to the dealer, you will not be impacted by the unpredictable used car market.
The Disadvantages to Leasing a Vehicle
- For the most part, you are stuck with the terms of the lease agreement for the duration of the lease period. If your life circumstances changed (for example, a new baby, moving to snow country, job loss, etc.) you are stuck with the vehicle until the end of the lease period. It’s expensive to have the lease agreement terminated. If you own the car you can sell or trade it and get another one.
- If you go over your mileage you may be penalized and it can cost you a great deal of money.
- If you choose to buy out the lease at the end lease you will be paying much more for the car than if you had purchased it instead of leasing it.
- If you modify your vehicle beyond the factory specification, then you could be penalized.