When is comes to autos, is buying really better?

STAFF
Published: March 22, 2008

Conventional wisdom when it comes to the car business has always been that buying a car is always better than leasing. After all, at the end of your car payments, you’ll own the car if you financed it, whereas once a lease is finished, so is your time with the car.

But does conventional wisdom still apply in the current climate, when vehicles are more expensive than ever? Perhaps a look at the pros and cons of leasing versus buying a vehicle will paint a clearer picture of just what prospective car buyers are in for.

Why Buy?

As previously mentioned, car buyers who finance their vehicles will have a car to call their own once their payment schedule is over.  Unlike a lease, buying a car allows drivers to look forward to the day they don’t have to write that monthly car payment check to their lending institution.

Another advantage is the option to sell the vehicle once you’ve made your last payment. Once you own the car, it’s yours to keep, sell, donate, etc. The chance to make some of their money back at the end is one reason many people choose to buy as opposed to lease.

Freedom is also an advantage when buying as opposed to leasing. A vehicle lease comes with mileage restrictions. A standard lease typically limits drivers to 12,000 milers per year (1,000 per month). More miles can be purchased at the start of each lease, but the monthly payment will go up. Once a lease has begun, negotiating for more miles is almost always out of the question.

When buying, drivers can put as many miles on the vehicle as they’d like, without fear of the steep penalties that come whenever mileage restrictions on a lease are violated. Some leases charge 99 cents for every mile over the agreed upon number. For example, if you agree to a three-year, 36,000 mile lease, but return the car with 40,000 miles on it, you’ll owe the dealership roughly $4,000.

Why Lease?

Besides leasing for a business, the most common reason people lease is rooted in money. Initial payments on a lease are far less than if drivers were to buy the same car. Little or no down payment is required of most leases, and the monthly payment is far lower as well. While some dealerships might allow you to buy a car with a smaller initial down payment, such leniency will come back to haunt you in the monthly payment, which will be substantially higher.

Leasing also satisfies the appeal of driving a new car every few years. Since it’s a dealership’s intention to sell a leased car once the lease is over (and not re-lease the vehicle to someone else), leases are typically kept in the 36- to 48-month range. That way, the dealer gets the car back relatively new with a reasonable amount of miles on it, making it more appealing for resale. This means drivers who lease can, on average, expect to spend a maximum of four years driving the same car.

Banks also play a role in making leases more appealing to some people, particularly those in the luxury car market. Most banks cap their vehicle loans right around $30,000, meaning they won’t allow drivers to borrow more than $30,000 for a vehicle. As most people know, luxury cars are typically far more expensive than $30,000. So unless drivers can put down a large down payment or buy a luxury car outright, leasing might be the only way they can find themselves riding in the lap of luxury.

Why Shouldn’t You Buy?

The biggest reason not to buy a vehicle is arguably the most widely known: cars are bad investments. Cars greatly depreciate in value the moment you drive off the lot. Within the first two years of being purchased, new cars can depreciate in value by as much as 40 percent. This greatly diminishes the benefit of resale once you’ve finished your payment schedule and are the vehicle’s lone owner.

For buyers who put down a very small initial down payment, buying can also create an uncomfortable scenario where the cost of the car far exceeds its value. Such a scenario has done much to change the conventional wisdom on leasing. As cars continue to become more and more expensive, many would-be buyers are realizing they don’t have enough money to make a significant down payment, and therefore they’ll eventually find themselves paying far more for the car than it’s actually worth. This realization has led many to leasing, which also has its disadvantages.

Why Shouldn’t You Lease?

Drivers who lease don’t have the “no more monthly payment” pot at the end of their rainbow. By leasing, you’re accepting that you’re going to have monthly payments for at least the terms of one lease. Plus, you have no car at the end of the lease period unless you enter into a new agreement.

Insurance is also a major disadvantage to leasing. While you’ll need full coverage on a car whether you buy or lease, the amount of coverage insurance companies require on leases tends to be a lot higher.

And, of course, anyone who drives a lot, be it for work or pleasure, avoid leasing because of the mileage restrictions. Extra mileage payments at the end of a lease and penalties for dents and dings have a way of sneaking up on drivers, and if you don’t have the money when it comes time to turn the keys in, you may be forced to turn your lease into a loan and buy the vehicle, negating all of the aforementioned benefits of leasing.