Sunday, June 13, 2010

To buy or lease?

“Nobody walks in L.A.” is not just a line from the band Missing Persons one hit wonder; rather it is a succinct description that encapsulates Angelinos obsession with cars. In Los Angeles cars are looked at as more than just a mode of transportation, often they are viewed as an extension of our character and individuality. With a vast array of options to choose from, picking the right car is only half the battle, the second most important question you need to ask yourself nowadays is should I lease or buy?

It is a common dilemma and question that I have been asked numerous times by friends and clients alike. And my answer has always been…it depends. It is a question that does not have a simple answer, and always depends on the particular person’s situation. From a tax perspective new laws and initiatives have made doing one or the other a virtual coin flip when it comes to capturing deductions.

Leases and purchase loans are two completely different methods of automobile financing. One finances the use of the vehicle while the other finances the purchase of the vehicle. Each has its PROS and CONS, and when making such a decision one should not only look at the financial implications, but personal priorities should be assessed as well. You need to ask yourself what type of car owner am I? Do you like the idea of having a new car every 3 or 4 years with no major repair risk? Or are you the type of person who tends to keep your car until it’s paid off and enjoy the idea of not having a car payment?

When you buy, you pay for the entire cost of a vehicle; regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade-in the vehicle for its depreciated resale value.

When you lease, you pay only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. Leasing is not the same as renting. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called the money factor, that is similar to the interest rate on a loan. You may also be required to pay fees and possibly a security deposit that you don't pay when you buy. The amount of miles you drive per year also affects the terms of your lease; the more you drive the more you will pay per month. There are also penalties when you go over your allotted miles. So if you know that you will be putting a lot of miles on your vehicle, leasing might not be the option for you. You make your first payment at the time you sign your contract — for the month ahead. At lease-end, you may either return the vehicle, or purchase it for its depreciated resale value.


As an example; if you lease a $20,000 car that will have, say, an estimated resale value of $13,000 after 24 months, you only pay for the $7000 difference (this is called depreciation), plus finance charges and possible fees.

When you buy, you pay the entire $20,000, plus finance charges. This is fundamentally why leasing offers significantly lower monthly payments than buying. This is also the reason why high-end and high priced automobiles are so commonly seen in L.A., because leasing makes an otherwise unaffordable car based on it’s sticker price affordable. Leasing also gives you a sense of “worry free” driving allowing you to forgo any major repairs, which are covered by the dealership during the term of your lease. When you buy a car and once the manufacturer’s warranty expires all repairs and maintenance are the owner’s responsibility. Other factors need to be considered as well like purchasing GAP insurance, which protects you if you owe more than what your car is worth. For example if your car is stolen and you owe $20,000 on your loan but the value of your car is only $15,000, GAP would cover the $5,000 difference, without it you would be responsible for the difference yourself. GAP insurance is usually factored into most lease programs as opposed to having to purchase GAP insurance from your lender outright when you chose to buy a car.

With some dealerships offering APR’s (annual percentage rate) as low as 0% on purchases for 60 months, deciding between leasing or buying is more difficult than ever. Cars, even in the lower or middle range of the spectrum are becoming more advanced and in some cases more reliable as well, it is not uncommon to see cars with well over 100,000 miles and still going strong.

So which is better? If you are comfortable with always having a car payment and get bored of your car easily then leasing might be for you. I for one have owned only 3 cars in nearly 20 years of driving and have yet to lease. I tend to buy a car I really like and enjoy the idea of having it paid off and taking care of it for as long as it is able to take care of my needs. There is a certain pride in owning something outright without a car payment looming over your head every month. Sure everyone wants the latest shiny sports car that can park itself or rugged SUV that will probably never see dirt. But there’s something to be said about having old reliable parked out on your driveway, with its nicks and scratches that add to its character. And its foibles that contribute a human element, which creates a bond between car and driver.

3 comments:

  1. Great article. This is a particular subject I have been debating for a while, especially as my older Honda is starting to show signs of major "depreciation." I still have many PROs and CONs to weigh myself but this article will be a huge help when trying to prioritize my car needs.

    Thanks.

    Keep it up.

    ReplyDelete
  2. No car payment? What's that like??? :)

    ReplyDelete
  3. This is a Wonderful informative it is a very useful to me thanks dear to share such an excellent informative post.

    ReplyDelete

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