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Decide Whether to Buy or Lease a Car

Feb 07, 2017 5 min read Wanda Thibodeaux

Key Takeaways

  • Buy, buy with babies in tow.
  • A promotion at work could give you a new lease on wheels.
  • Lessees appreciate depreciation — but other costs can add up.

 

When you need a vehicle to get around, your two major choices are to buy or lease. Both of these options can work exceptionally well, but which one is "best" is a somewhat murky territory with a lot of different factors to consider. These three common scenarios demonstrate just how much the right choice can vary and shed some light on what you might want to do under different circumstances.

 

 

Scenario 1: Family change—you have two kids now (buy)

With all the expenses children bring, it can be hard to swing higher vehicle payments, as buying requires. But in return for doing so, you can take the long-term savings you get from buying and put it toward child care needs or education accounts. Additionally, children often can mean unintentional damage to a vehicle. If you buy your car, this might not look so great, but it's not going to hurt your wallet too much. Take that damage into a dealership with a leased vehicle, though, and you can get hit with an excessive wear and tear penalty.

 

Scenario 2: Lifestyle change—you earned an awesome promotion (lease)

Here, even though you're paying more over time, the lower monthly payments you get with a lease allows you to splurge for a vehicle that's more higher-end. That can make a difference when other people—for example, potential clients—see you driving around or accompany you. And if you're working hard with extra responsibilities on your plate, the reduced hassle that comes with leasing, such as the maintenance services, can take a lot of stress off. The potential for a tax deduction if you use the vehicle for business is icing on the cake.

 

What works at one point in your life might not be the best route at another time.

 

Scenario 3: Accident—you (almost) totaled your less-than-a-year-old car (neither buy nor lease)

Most insurance policies allow you to recoup the cost of repairs and labor if you are in an accident. Unfortunately, vehicles that are in wrecks are almost always appraised at a lower value compared to identical cars that haven't experienced accidents. The loss can reach into the quadruple digits, depending on the vehicle and damage involved. Although some companies now offer coverage to protect you from this circumstance, most policies don't allot for this, so if you're buying, you take a hit out of the equity you'd have after you finish making payments. Your best bet here would be fix the car and keep it, because if you trade the vehicle in, you have to make up the difference between the value of the repaired car and the replacement car. However, there is a chance that the repaired car might experience issues if fixes are less than stellar. If you want a guarantee you'll be free of these hassles, fix the car and trade it in. You won't end up with as much equity as if you kept the repaired car, but you'll have the peace of mind of a fresh start.

 

A general rule of thumb

From the examples above, you can see that what works at one point in your life might not be the best route at another time. But if you’re looking for a general guideline to follow as a starting point, keep in mind that, when you buy a car, your payments are based on the entire cost of the vehicle. If you lease, though, your payments are based only on how much the vehicle declines in value, or its depreciation, while you use it.

Because leasing allows you to pay based on the vehicle's depreciation, you're generally going to have smaller monthly payments when you lease than if you buy. You can invest your savings from these lower payments, and lessees often can get tax breaks in most states, as well. Many leased cars have warranties that make paying for maintenance zero-dollar or very low cost. But other expenses, such as higher finance charges, lease initiation and disposal fees, higher insurance and penalties for extra miles driven (typically anywhere from 5 cents to 20 cents per mile) can tack on a pretty penny to what you owe. Additionally, at the end of a lease, you don't own the vehicle, so you don't gain equity. If you buy, you can sell the vehicle and get its current value, or you can trade it in and subtract that value from the new loan amount you need to borrow. For these reasons, if you're looking at long-term figures, after adjusting for maintenance and operational costs, it's typically savvier to buy than to lease.

 

What you can do next

In the long run, buying a car usually beats leasing—but timing can be telling, and what works best at one stage of your life might not at another. Use calculators to crunch the numbers, talk to qualified vehicle and financial pros and, whichever funding route you choose, shop around.

 

Wanda Thibodeaux is a freelance writer and sole proprietor of Takingdictation.com. Her work has appeared in online and print publications such as The Finance Base, Legal Beagle, Bankaroo and Inc.com.

 

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