Lease vs. buy? 10 Things to consider before purchasing your next car.

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So you’re planning on buying a new car – an exciting proposition. But before you even start picking out the make, model, paint color, and start pre-setting your radio stations, you have an important decisions to make: to lease or to buy. The good news is that there isn’t one “right” answer, but what’s best depends on a variety of factors and preferences.

Here 10 considerations about leasing vs. buying you should familiarize yourself with before ever stepping foot into a dealership:

1) Understanding a lease agreement:
Leasing is generally only an option for financing brand new cars, not used cars. When you lease, you pay only a portion of a vehicle’s total value, which is the part of the value that you “use up” during the time you’re driving it.  At the end of your lease, you may either return the vehicle, or purchase it for the part of the value that you haven’t already paid. The purchase price is stated in your contract at the time you sign.

2) Which is more important, a lower monthly payment or paying towards ownership?
Most people don’t realize that if you were to put the same amount of money down on a leased car as a financed car, the monthly payment on your leased car would typically be lower—generally 30% to 60% less.

However, the long-term cost of leasing is more than the cost of buying in most cases. If you keep your car after the loan has been paid off and drive it for many more years without a monthly payment, the cost is spread over a longer term. The cost of buying one car and driving it for ten years is less expensive than leasing or buying four or five different cars over the same period. Therefore, over the long haul, leasing is always more expensive.

3) How much are you driving?
Since a car’s mileage affects its resale value, leases generally have an annual mileage limit, usually 10,000 to 15,000 miles per year. And according to the U.S. Department of Transportation Federal Highway Administration, the average American driver logs 13,476 miles each year, so once you go over the specified mileage on your leasing contract, you will incur mileage charges. If you anticipate going over the mileage cap, you can negotiate for a higher annual limit, but it will likely increase the cost of the lease. You can also pre-pay for the additional miles at the time of signing, because it’s typically cheaper to pre-pay rather than to pay at the end of the lease.

When you buy, there are no rules on mileage, the car is yours to drive as little or as much as you like.

4)  Are you a commitment-phobe?
There’s less commitment when you buy than when you lease, and that may be attractive to some people. Remember that when you buy, you can drive the car until the wheels fall off—or, you can sell it or trade it in at any time and pay off the remainder of your loan. But when leasing a car, if you end your lease before the term is up you’ll incur costly early termination fees.

5) Are you looking for a tax write-off?
Come tax time, if you own your own business your car will be used for business purposes, you can write-off most, if not ALL, of the payments by leasing.

When you purchase a car, you can only write-off a portion of the depreciation or take the mileage deduction.

6) How well do you keep up the maintenance?
Reasonable wear-and-tear is expected, and is written into a car lease contract. And most leased cars are under warranty for the duration of the lease, so repair costs are minimized, which is a great bonus. Some dealers even offer free maintenance programs during all or part of their lease agreement, so all you need to worry about is putting gas in the car.

When you purchase a vehicle, there is a term of the warranty, usually for a certain number of years or up to a certain mileage, whichever comes first. After that, you’re responsible for the maintenance of your vehicle. Big-ticket repairs can cost you thousands of dollars, negating any savings you may have expected by buying.

7) Do you want to customize or make after-market enhancements to your car?
Customizing is generally not advisable with a lease. For most lease agreements, you can do it, but once your lease is up you will be required to remove the custom parts and pay for any damage to the car from the modifications you made. So if you’re interested in making modifications to your car, like a new stereo, intricate roof rack, or definitely a paint job, you’d be better off buying your car.

8) What’s your credit score?
Generally speaking, it is easier to get approved for a car loan that it is for a lease because leasing requires a higher credit score. A good score might mean the difference between leasing and buying, what you’ll pay in finance charges, how much down payment you’ll be asked to make, or whether you’ll be approved at all. So make sure to check your credit score before you start shopping so you’ll know your options and if you even qualify to lease.

9) Have you considered taking over someone else’s lease?
Research shows that the best way to drive a later-model (but still new-ish) car at the lowest possible cost is to take over someone’s existing car lease.  Most lease companies allow consumers to transfer their lease to someone new by simply paying a small transfer fee. It’s less expensive than buying or taking out a new lease, and you avoid all the up-front hassles, negotiations, and fees.

Assuming the original lessee got a good deal, the new lessee will inherit the same great deal, same low monthly payment, put no new money down, incur no up-front sales tax, and in many cases, even might get a cash incentive from the present owner.

10) No matter if you decide to lease or buy—NEGOTIATE!
You should negotiate the selling price even if you are planning to lease, just as you would if you were planning to buy. Dealers always have “wiggle room” when it comes to negotiating agreements and are far more motivated than you are to make the sale. Do your research beforehand, know what deal you want, and don’t be afraid to negotiate…or walk away! (They’ll probably call you back, anyway.)

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In summary…

You should LEASE if…you enjoy driving a new car every two or three years, want lower monthly payments, like having a car that has the latest safety features and is always under warranty, don’t like trading or selling used cars, don’t care about building ownership equity, have a stable predictable lifestyle, drive an average number of miles, are willing to pay more over the long haul to get these benefits, and understand how leasing works.

You should BUY if…you don’t mind higher monthly payments at first, like owning your cars for more than 2-3 years, prefer to build up some equity (trade-in or resale value), enjoy the idea of having ownership of your car, like paying off your loan and being payment-free for a while, don’t mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, or you might have lifestyle or job changes in the near future.

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