Are you in the market for a new vehicle? While you may be dreading the prospect of negotiating with a salesperson, you have important choices to make: To lease, to buy, or to buy new or used? While buying or leasing each has their own advantages, there are important differences you should consider, even before you talk to a salesperson. Consider the following questions:
Who owns it?
In a lease, the car technically isn't yours; you're liable while you use it for a period of time. You'll have to return the car in good condition at the end of the lease period, and then lease or buy a new one.
Usually spelled out in the first paragraph of a lease agreement is the fact that you, the customer, are responsible for appropriate repairs and maintenance on your leased vehicle. Most leased cars will also include a warranty that's pretty much like what you'll find on a purchased one. What's different? Well, you give up a little freedom by driving a car that isn't yours: When you buy, of course, you own the car outright once it's paid for, and you can do whatever you like with it.
Conversely, since the leased car isn't yours, there are limits on what you can do with it. The dealership will give you some allowances as far as mileage and general wear and tear, but if you're a little too rough on it, or drive a little too much, you could end up paying extra at the end of the lease term.
Which is more expensive?
For a lease, typically you'll need to pay up front for the first month's lease payment plus taxes and registration, as well as something called a capitalized cost reduction (like a down payment). If money is a concern, leasing is typically the less expensive option. Here's why: When you lease, you're financing only part of the vehicle's total price. You're going to be paying, via monthly payments, the amount that the vehicle is expected to depreciate over the lease period. So, your total capitalized cost (or cap cost for short, same as "financed amount" in a purchased car) is going to be lower. When you buy, in addition to paying a larger down payment (a percentage of the full sticker price, not just the cap cost), you'll be paying installments on the total cost of the vehicle, plus interest, over a longer period of time.
Which is a better value?
As we all know by now, a new car is not an investment. As soon as you drive it off the lot, its value begins to plummet. On average, most new cars will lose around 20% of their value in the first year, according to Fool.com. When you lease a car, paying only depreciation works in your favor, because you can be reasonably certain you'll never be "upside down" in a lease -- "upside down" is when you owe more on a car than the vehicle is currently worth. Not a good situation to be in!
What about used cars?
Buying a used car, when compared to leasing a new car, can appear to be a more attractive picture, but there's still the cost of repair and maintenance to consider. A new car will typically be covered by a better warranty than a pre-owned vehicle, and maintenance costs always escalate as a vehicle ages. According to SafeCarGuide.com, the average annual cost for maintenance and repair on a new car is around $600, while a five-year old car's annual cost increases to an average of $900, and this varies pretty significantly from one make and model to another. A five-year old Range Rover, for instance, will run approximately $2,000 each year, while the Toyota Land Cruiser was much lower, at a much-more-palatable $600 annually.
Which is right for my needs?
This is a question only you can answer for sure. Here are a few extra things to consider:
• Leasing is less expensive - but you gain no equity by making lease payments.
• Leased vehicles typically have limits on wear and tear, mileage, and fees for early termination.
• Both leased and purchased vehicles will include a warranty, and you are always responsible for repairs.
Any car -- whether purchased or leased -- loses value over time. The choice to buy or lease is also a choice between whether you want to be responsible for that lost value, or if you want to allow the seller to bear that responsibility. Leasing makes it easy to get into a new car every few years. You won't worry about remaining balances on previously financed cars, and you won't need to try to sell a vehicle before you buy. Buying allows you to drive your car, with proper maintenance, well into the hundreds of thousands of miles.
Your personal preference plays a large role when deciding whether to buy or lease. When you buy a car, do you want to drive it for eons to come, or would you prefer to be in a new car every few years? Do you simply need to save money by paying less now, or do you prefer the freedom and equity that purchasing gives you, for a little extra cash each month?
There are no right answers, of course, but that doesn't mean you shouldn't try to get your money's worth.
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