From Route One to Route 66, Americans love their cars. As gasoline prices have shown, however, the costs associated with having a car don't go down.
If you're looking for a new car, truck, minivan, or SUV, leasing might be a way to keep your monthly auto expenses down - under some circumstances. When determining whether to lease or buy, time becomes a key factor based on the question - how long do you plan to keep this vehicle? While the short-term costs of leasing or buying are about the same - assuming an owner sells his or her vehicle when the loan is repaid - the long-term costs are quite different.
Most buyers take out a loan because they're paying for a vehicle's total cost. Once the loan is successfully repaid, the vehicle is yours to keep or sell.
On the other hand, a lease is a long-term rental agreement in which you pay a specific amount for a specific time (usually between two and five years) based on the vehicle's depreciation during the lease term, interest, taxes, and fees. Leases allow you to return the car at the end of the term and get a new vehicle, and reduce your risk on the car's future value.
While your decision will be based upon your individual situation and need, there are rough guidelines that can help determine the best option.
When your lease is up, you must return the vehicle and get a new one, unless you opt to buy the leased vehicle. If you've purchased the vehicle under a loan agreement, it's yours when the final loan payment is made.
The monthly payment under a lease is usually lower than the monthly payment under a loan agreement because you are paying for only the depreciation and finance charge for the term of the lease. If the vehicle is used for a business, leasing may also carry some tax advantages.
Owning a vehicle means your long-term vehicular expenses are lower, if you keep the car after the loan is repaid. Moreover, while the up-front costs for both options include taxes and registration fee, a lease usually requires a security deposit, acquisition fee and in some instances a disposition fee. In addition, once the lease ends, you return the vehicle and will be liable for nothing else, unless you have exceeded the mileage or there is excessive wear and tear on the vehicle. Paying off a loan early means you simply pay the balance due. If you terminate a lease early, you may be required to pay an early termination fee. In addition, the lessor may be entitled to the total monthly payments remaining plus the residual value, which in some instances could be significantly more than the value of the vehicle.
If you own, you can drive as many miles per year as you like. Most leases include annual mileage restrictions, along with clauses limiting excessive wear and tear. If you own your car, you pay for excessive wear and tear when you try to sell (since that comes off the trade-in or resale value).
While it costs less per month to lease a car than to own one, if you plan to own the car for a longer period of time, it's more economical to purchase it outright. Your best bet is to sit down with your calculator and determine which alternative works best for you and your budget.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.