Thursday, July 9, 2009

Can We Save Money By Leasing Cars?

It's a common dilemma: to lease or buy a car. The former involves the use of a vehicle while the other involves the purchase of a vehicle and each has its benefits and drawbacks.

When you buy, you pay for the entire cost of a vehicle, regardless of your mileage. You typically make a down payment, pay sales taxes or roll them into your loan, and then pay an interest rate based on your credit history. Later, you may decide to sell or trade the vehicle for its depreciated resale value.

When you lease, you pay only part of the car's cost which you "use up" during the lease period. Usually no down payment is needed, only a sales tax and a financial rate (money factor), similar to a loan interest. There could be other fees and maybe a security deposit. At lease-end, you either return the vehicle, or purchase it for its depreciated resale value.

For example, if you lease a $30,000 car with an estimated resale value of $20,000 after 24 months, you need only fork out the $10000 difference (depreciation), plus finance charges and fees. If you buy, then you have to pay the entire $30,000 plus charges.

Advantages of Leasing

To summarize, buying or leasing depends on your individual needs. It's not possible to simply say that one is always better than the other without making financial comparisons and evaluating your personal priorities.

Ask yourself the following questions? Do you prefer driving a new vehicle every few years with little repair risks? Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment?

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.

Buying a car is like putting money into a declining-value savings account — you never get out as much as you put in. A portion of monthly payment is lost to depreciation and finance charges. When you pay off the loan fully, you own a car which is worth substantially lesser than your vested money.

It doesn't make financial sense but then cars are not usually purchased as investments, are they? It is more for convenience and a symbol of prestige.

Leasing takes away the savings portion which makes for significantly lower monthly payments. You only pay for what you use and you don't build up any equity in the asset. In other words, ou you have nothing to show for all your paid up money at lease end.

However, since a car's value depreciates the same amount whether it is leased or purchased, what you don't own is actually the depreciation. That money is lost forever, whether you buy or lease.

Leasing also offers GAP coverage or insurance which pays the difference between what you owe on your loan/lease and the market value if your vehicle is stolen or destroyed. Most loans do not include such a feature.

Gap coverage is important because modern exotic financing often leave many people owing more on their loan or lease than the car is actually worth. This means you'll still owe money (hundreds or thousands of dollars) to the finance company even after your insurance has paid off a car that has been stolen.

You're better protected with a lease which is usually tied with gap insurance whereas a loan requires you to purchase the gap insurance separately at extra cost.

While leasing offers superior savings in the short term, it is important to understand that the financial details are more complicated; with residuals, money factors, and should be properly evaluated.

Some folks may also prefer lease-to-buy plans which is to buy the vehicles at the end of the lease, or before the end of the lease. This is nearly always more expensive than simply buying outright. You can use this tactic but be aware that it costs you more in the long term.