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To Buy Or Lease?
Overview
Buying vs leasing is a very common question nowadays. In fact,
leasing accounted for over 42% of all new cars last year, and the
number is growing at an increasing rate. It is projected that
approximately 48% of all new cars will be leased by the end of 2000.
Leasing is the process of "renting" for a specific amount of time.
In effect, you are only paying for a portion of the value of the
item, not its entire value. While many different types of equipment
are available for lease, the most prevalent type of leasing occurs
with automobiles, so we will concentrate on this area. Usually, the
lease is for a 2-5 year period. You put up an initial security
deposit, and usually 1-2 months' advance lease payment. In addition,
when it comes to leasing a car, you pay for registration, taxes, and
plates. The most prevalent type of lease usually stipulates that you
will handle the maintenance and repairs as well. Most car leases
have a surcharge for driving more than a certain number of miles
over the term of the lease. The majority use a 10,000 to 12,000 mile
per annum figure. If you exceed this figure, you may pay 10-30 cents
per extra mile on average.
At the end of the lease, you turn the car back in. If there has been
any "excessive" wear and tear on the vehicle, it is usually your
responsibility to make good on the costs. Depending on whether you
have an open-end or closed-end lease, there may be extra charges as
well if the car is valued at less than the originally agreed-upon
"residual value." In many lease deals, at the end of the term you
may buy the car at a "lease buyout price."
As you can see, leasing may or may not be better than buying. Here
are a few comparisons:
Benefits to buying
Car has a residual value to you after a time. You can sell it.
No restrictions on how many miles per year you can drive it.
No insurance problems associated with a "premature" termination.
If a home equity or investment-type loan is used to finance, the
interest charges may be deductible on your tax return.
You can treat the car any way you wish. No turn-in problems with
arguing over residual value.
Benefits to leasing
Usually less up-front money to drive car away.
Lower monthly payment, but not necessarily lower total costs.
It is a form of "off-balance sheet" financing, so it may not add to
your borrowing maximums for other loan qualifications.
The higher the cost of the car, and the higher the business use
percentage, the greater the tax advantage may be under certain
circumstances.
Some leases may be easier to get than a loan for those with weaker
credit.
Two Main Types Of Leases
Closed End Lease
This is the most common type used by consumers. At the end of the
lease period, you "walk away" from the car. The so-called "residual
value" of the car is determined at the beginning of the lease, so
you only pay a fixed amount over a fixed period of time. Tip: Get an
option to buy the car at the expiration of your lease.
Open End Lease
Although this type allows for a smaller monthly payment, it does so
because you are taking extra risks at the end of the lease-the risk
of value decline of the vehicle. For this type of lease, you set the
value at the beginning of the term, but, unlike the closed end
lease, you pay extra if the car is worth less at the end than the
price you set at the beginning. Conversely, if it is worth more, you
would get a rebate. This lease type can be a disaster if the
residual value of a car model drops due to changes in demand, or
manufacturers' defects.
Questions To Ask
Deciding whether to buy or lease depends on a number of issues, some
financial, some purely qualitative. Some of the questions you should
ask yourself before deciding are:
How many miles do I drive per year?
How long do I want to drive this make/model car?
What kind of monthly payment budget do I have?
What deductible business-use percentage will I qualify for?
How much do I enjoy the feel of a new car?
How good am I at reading contracts?
Assuming you have answered these questions to your satisfaction, the
financial comparisons of buying vs leasing are quantifiable, as can
be seen from the enclosed comparison that has been prepared for you.
Some Tips
Shop around; leases are very different, and very negotiable.
If the car you are interested in is being offered at super low
financing, or with high rebates, odds are it will be cheaper to buy
than lease over the long run.
Don't assume the leasing terms for the car you want are set in
stone. Items such as excess mileage, excess wear, early termination
clause, advance preparation fees, and Gap insurance can be
negotiated to some extent.
Seriously review the "early termination" penalties. These are extra
charges you may have to pay if you turn in the car early before the
lease expires. Many companies will charge you these penalties(which
can be very steep) even if it is not your fault-such as a stolen
car, or a car that gets totalled.
Watch for unusual restrictions in the contract such as where you can
and cannot drive the car. Some leases don't allow you to drive the
vehicle out of the country; some don't allow you to drive it out of
the state.
Consider buying Gap insurance especially for the early years. This
insurance covers the difference between the car's depreciation value
at the time of mishap, and what you still owe on the lease at the
time. They are rarely the same in the early years.
Consider having your lawyer review the lease before signing.
Remember, this is a contract that is for a relatively large sum,
filled with many legal clauses, and it can have a definite impact on
your credit rating, among other items.
Definitely review the excess mileage clause. Some leases have very
low monthly payments because they only let you drive 5,000 miles per
year without penalty charges. Make sure your yearly driving average
is within the ballpark of the lease's allowance, or be prepared to
pay the extra mileage charges. As a tip, if you negotiate this extra
charge before signing the lease, you may be able to greatly lower
this extra cost-by as much as 50%.
Leasing falls under the Federal Consumer Leasing Act, so be aware of
your rights; get a copy of these rights from the lease company.
As you can see, whether leasing or buying is best for you depends on
a number of issues, financial facts, and "guestimates." Hopefully,
this analysis will help to shed some light on the issues and options
to make it easier for you.
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