The New Car Dilemma: Lease or Buy?

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If you are in the market for a new car, it’s a good idea to compare the costs associated with buying versus leasing.

When you’re trying to decide from a financial position, experts advise to run the numbers over a ten-year period. But they all tend to agree on one point: If you want a trouble-free experience and only keep your cars for five years or less, leasing may be your best bet since the real cost of owning a car will be slightly higher. Very few people drive their cars five years or less, so this is why a ten-year span makes more sense to compare.

When considering costs, it’s important to remember that the monthly payment is only one factor. You’re comparing leasing to buying.

When you sign a lease, you start over every three or five years. Most likely, you will have a new down payment again and your insurance rate and taxes will go up because it’s a newer car. Yes, you should have lower maintenance costs, but you will have no equity or ownership in the car. Your payments will never cease. In other words, you will always have a monthly car payment!

Now, say you initially bought your car and kept it for ten years. After that time, you’ve probably spent more on maintaining it, but your insurance rates and taxes will decrease and you will have paid off your car earlier, hopefully around the five-year mark. You now have equity in your car and can sell it or trade it in to offset the cost of a newer car.

Yet another factor to consider when buying or leasing is whether you intend to finance the purchase or buy it outright. If you are planning to finance the car and you don’t want to give up a lot of cash, leasing may work best because you will put less money down. In many cases, dealers may even waive a down payment altogether for a leased car.

However, if you see any instability in your foreseeable future that would cause you to terminate your lease early, don’t lease. You could end up owing a heavy portion of the remaining payments. Also note that, in general, leases are not as flexible as owning a car. If you are tired of your car and want out of a lease before it’s up, you may end up owing a penalty.

If you don’t believe you can adhere to the mileage caps and avoid the extra fees and penalties that can occur with leases, buying your car may be best for you. Take, for example, a three-year lease with a 12,000-mile annual limit. By the time your lease expires, you will be required to turn in the car with fewer than 36,000 miles on the odometer. If you are over 10,000 miles, depending on the overage fee, you could be facing a penalty of up to 25 cents per mile! That’s a $2,500 penalty.

On the other hand, if you don’t drive very much, you could be paying for depreciation you aren’t causing, so you may be able to negotiate with the dealer up front on this point. If you are rough on your car and don’t keep it in good condition, or you find yourself carting around messy kids, dogs or equipment, remember that the damage done may have to be repaid at the end of your lease. Most leases have a buyback clause that allows you to purchase the car at the end of your lease. If you can buy it for less than its current market value, this could make good sense.

With the introduction of electric vehicles, most drivers who choose this technology seem to be opting for leasing. One reason is that they are not convinced that a long-term commitment of owning the car is in their best interest. Two years ago, leasing represented about 75 percent of the electric car market compared to only 28 percent of the overall car market.

Apparently, electric car buyers are expecting something better to come along that would lower the value of their car long term. Some electric car models have been offered with leases lower than $200 per month over three years because the federal, state and local incentives, together with manufacturer and dealer discounts, are applied to the lease when you drive it off the lot. Some people in California have gotten brand new cars leased at just over $80 per month! Of course, if you opt for a traditional car, these electric-car incentives wouldn’t apply.

Whether you’re buying or leasing, it may be a good idea to consult your tax advisor. There are issues to consider with regard to deductions and depreciation specific to your situation that could end up saving you thousands of dollars. ■

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