Key Takeaways
- Leasing limits your mileage, but you don’t tie up cash, you drive a late-model car, repairs are limited, and you don’t have to sell.
- Buy if you’re looking at used vehicles that you plan to drive for three-plus years and you don’t expect major lifestyle changes.
As many of you know, I like to keep things simple. I learned a long time ago that 95 percent of fear is caused by two factors: Either we’re afraid we’re not going to get what we want, or we’re afraid we’re going to lose what we already have.
Let’s take the decision about leasing versus buying a car. There are three questions you need to answer:
- Are you buying used? If so, then don’t lease.
- Are you going to drive the car for more than three years? If the answer is yes, then you probably shouldn’t lease.
- Are you going to have a major lifestyle change in the next three years requiring a bigger car, a different kind of car, or driving a lot more than you usually do? If that’s the case, then don’t lease.
Deconstructing a lease
So if you answered no to any of the questions above, a lease could make more sense. But, what really is a lease? It’s an agreement between the manufacturer, the financial institution, and you to let you drive their car for a preset time period—typically three years—then return the car to the dealer when the term is up. Your monthly payment is determined by the maximum number of miles that you plan to drive the car each year—typically 12,000 to 15,000—as well as your credit rating, and the residual value of the car set by the manufacturer based on those factors. Typically, a lease will cost you $10 to $30 less per month than a car loan, but there are other pros and cons to consider.
Leasing pros and cons
First, the pros. You get the full three-year manufacturer’s guarantee from the automaker. Also, you don’t have to pay for major maintenance, such as brakes and new tires. Third, you don’t have to worry about the value of the car. You’re going to turn it in at the end of the lease term. Fourth, you’re not locked into a 72-month car loan.
What are the cons of leasing? First, leases are tough to cancel prematurely. You sign a lease and you’re locked into driving that car for three years. Second, you can’t sell the car or trade it in, and there is a penalty of 15 to 20 cents for every mile you drive over the maximum mileage that you agreed to when you signed the lease. Finally, you’re handcuffed by your lease terms and the vehicle selected, which can be problematic if you have a major lifestyle change during the three- to five-year term of your lease.
Before signing on the dotted line for your next vehicle, go through the three questions above and make sure you go through the pros and cons carefully.
Gary