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Lease or Buy?

Automobile leasing can be a very attractive alternative to buying for many people. So, what benefits does leasing provide when compared to conventional purchase loans.

Leases and loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits.

It's not possible to simply say that one is always better than the other because the answer depends on each specific situation.

When making a 'lease or buy' decision you must look at your own personal priorities What's important to you?

Is having a new vehicle every three to five years with no major repair risks important to you? Is having some ownership in your vehicle more important than low up-front costs and no down payment? Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years?

There are things you need to consider. First, is to understand that buying and leasing are fundamentally different, not just two versions of the same thing.

When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract.

When you lease, you pay for only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called money factor, that is similar to the interest rate on a loan.

Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the Bank has tied up in the car while you're driving it. In effect, you are borrowing the money that the bank used to buy the car from the dealer. You repay that money in monthly payments.

Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the full vehicle purchase price, while the finance charge is loan interest. However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing — it's money you never get back, even if you sell the vehicle in the future. The remainder of each loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value. It's what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have. You never get back the amount you've paid for your vehicle.

Buy versus lease - savings account or no savings account

So, buying a car with a loan is essentially like putting money into a declining-value savings account — you never get out as much as you put in. A portion of every payment you make is lost to depreciation and finance charges. What you have "to show" for your investment when your loan is paid off is only the part that is left over after depreciation and interest. A terrible investment by any measure. But cars are not usually purchased as investments, are they?

Leasing, then, is similar to buying, but without the equity "savings account." You only pay for what you use and you don't put anything extra into "savings." It's true that you'll own nothing at the end of a lease; you'll have nothing "to show" for the money you've put into it. But... what you don't own is the same part of the car's original value — the depreciated part — that a buyer too doesn't own at the end of his loan. Again, a car's value depreciates the same amount whether it is leased or purchased. That money is gone forever, lease or buy.

With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing — such as paying the mortgage or buying groceries.

About 0% Loans vs. Leasing

Below is a comparison of a typical lease compared to a 0% loan and a conventional loan. Does this mean leasing is always better? Not necessarily, because monthly payments are not the only factor that should influence your decision.

Another Consideration

Most car leases have automatic built-in gap coverage, while car purchase loans almost always do not. Gap coverage, or gap insurance, pays the difference between what you owe on your loan or lease, and what your vehicle is actually worth if your vehicle is stolen or destroyed.

Why is this important? Because it's very common with car leases and loans, in these days of 0% interest, no down payment, and delayed payments, to owe more than your car is worth for most of the life of the financing. This can mean you'll still owe hundreds or thousands of dollars to the finance company even after your insurance has paid off — for a car you no longer have. This turns out to be a shocking surprise for most people caught in this unfortunate situation.

So, nearly all leases have it, but most purchase loans do not. You're better protected with a lease, unless you purchase the gap insurance separately at extra cost for the loan — if you can find somewhere to buy it.

Lease versus buy? Which one has the lower Payment?

The short-term monthly cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying.

For the same car, same price, same term, and same down payment, monthly lease payments will always be 30%-60% lower than loan payments. This is still true even when compared to 0% or low-interest loans.

So, which is better, lease or buy?

It depends on what’s most important to you. All of us have different lifestyles and priorities — in cars and in finances. Car lease-versus-buy decisions must be made with your own lifestyle and priority attributes in mind. What's right for one person can be totally wrong for another.

If you enjoy driving a new car every three to five years, want lower monthly payments, like having a car that has the latest safety features and is always under warranty, don't like trading and selling used cars, properly maintain your cars, then you should lease.

If you don't mind higher monthly payments, like paying off your loan to be payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, prefer to drive your cars for years to spread out the cost — then maybe you should buy.

But before you make your buy-lease car decision, you need to speak with a professional. Apple Leasing has almost 25 years of experience in the Automotive industry. We can help you to make an educated decision.

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