Wednesday, February 28, 2018

Buying a car Vs. Leasing a car

Buying a car Vs. Leasing a car

We've all seen those super-low lease rates on TV. "Get a 2019 Wiz Bang SE for only $299 per month!!!", then the disclaimer voice cuts in, telling you that you that this deal is only for "well-qualified customers with $69,000 dollars down". So is this actually a good deal in disguise?

What is a car lease?

Leasing a car is like leasing an apartment. You pay rent for the time that you live there / drive the car, but you never actually own the apartment / car. Granted, you never have to pay for maintenance or repairs. However, over the lease term, you windup spending a lot of money, without ever getting ownership. So how does this make sense?

To understand the financial difference, let's look at something called Depreciation.

When the Whiz Car Company sends a brand new Bang SE to the dealer, there's a certain value attached to it. This comprises a retail markup for the dealer, which goes away once you buy the vehicle. So if you get a $30,000 ride, that's only estimated (by the bank/finance company) to be worth $19,500 at the end of your 24 month lease, then you're financing the $10,500 in depreciation, plus finance charges & interest. If you actually purchased the same car, you'd be financing the entire $30,000, plus interest and finance charges.

This is why the monthly payment on a lease is so much cheaper.

During your lease, you're limited to driving the car a certain amount of miles per year because the mileage will ultimately help determine its value at the end of the lease. You're also for forbidden from making any changes to the vehicle (such as different wheels, or stereo equipment), as this too will effect the vehicle's resale value.

The up-side is, you can return the vehicle at the end of the lease, and get a new model. Or, you can buy the vehicle outright, by paying the remainder of the vehicle's value. Plus, you don't have to pay for repairs (and maintenance in most cases) during the lease term. Just gas it up and drive.

Buying a vehicle

When you purchase a vehicle, you're financing the entire $30,000, plus interest & finance charges. During the loan term, you're responsible for the repairs (outside of the warranty) and maintenance. But you can modify the vehicle any way you like, because you actually own the vehicle (unlike a lease, where the leasing company retains ownership of the vehicle).

When you're done with a lease, the car goes away. But when you buy the thing, it's there until you sell it. Flat tires, oil leaks, and faded paint, it's your baby.

The biggest hang-up that most have about a car lease is the fact that they never own the car. "You pay and pay, then you have to give the car back"...but that's the point! Leasing offers a non-committal automotive relationship, devoid of repair costs and complications. You put gas in and drive it. Then you turn it in two years from now...and get a new one!

So you have to decide just how committed you are to that Whiz Bang SE.

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