Should you buy or lease your next vehicle?

Wednesday, February 28, 2018

When it comes to buying a new vehicle, consumers have three options – buying outright, buying with a loan or leasing. For most people, buying outright is not an option, so consumers are left with a loan or lease option.

The choice between buying and leasing can be a tough call, said Cindy Clampet, Oklahoma State University Cooperative Extension family resource management assistant specialist.

“Typically, buying involves higher monthly costs, but you’ll own the vehicle at the end of the loan agreement and the car will still have cash value,” Clampet said. “Leasing, on the other hand, may look attractive due to the lower monthly costs. However, you’ll never own the vehicle and there isn’t any equity at the end of the lease agreement. You also may get into a cycle in which you never stop paying for a vehicle.”

Also, loan payments are usually higher because the consumer is paying off the entire purchase price of the car, plus interest, finance charges, taxes and fees. A lease payment is almost always lower because the consumer is paying only for the vehicle’s depreciation during the lease terms, plus rent charges, taxes and fees.

Clampet also noted a person who buys a vehicle is free to sell or trade at any time. There are penalties for ending a lease agreement early.

Most people hop in their car and drive wherever they want to without much thought to how many miles to the destination. When consumers own the vehicle, they can drive it as many miles as they wish without penalty. Lease agreements often have a mileage limit of around 10,000 miles per year, and if you go over that amount, the fees can be high. The average driver puts about 12,000 to 15,000 miles per year on a car.

Clampet also pointed out when consumers buy a car, there is no penalty for wear and tear.

“It’s natural for a family or individual to cause wear and tear on a vehicle. Drinks get spilled, seat coverings can get torn and carpeting wears down,” she said. “In the typical lease agreement, there will be something in there regarding excessive wear and tear. Make sure to read those details and find out exactly what is meant by excessive. Obviously, there’s going to be normal wear and tear, but it’s important to understand the verbiage in the lease agreement.”

Something else to consider is the ability to customize the vehicle. When you buy a car, it is yours to modify as you wish. Be careful not to void your warranty. A leased vehicle cannot be customized. If you do add parts, you may have to pay to have them removed.

To put numbers to a car buying vs leasing scenario, consider this hypothetical situation comparing a six-year note on a $29,429 car at 2.9 percent interest, compared to two back-to-back three-year leases of the exact same car at .024 percent.

The loan payment is $416 per month, and the lease payment is $287. The loan requires a $2,000 down payment and the lease calls for $2,000 at each new signing. After three years, the consumer who bought the vehicle has paid out $16,976 and the leased vehicle has required $12,332 in payments. At the end of six years, the car buyer has paid a total of $31,952, while the person leasing the vehicle has paid $24,664, which includes the two $2,000 payments at the beginning of each lease.

“You may look at those numbers and think the lease obviously is the best option. However, the owner of the car now has a vehicle worth $9,675 and can drive it now for just the cost of gas, insurance and maintenance,” Clampet said. “The person with the leased vehicle has nothing left over at the end of the lease and must now either purchase a vehicle or lease another one. If you’re trying to figure out which option is best for you, put a pencil and paper to it. If you enjoy having a newer vehicle every few years, maybe a lease is right for you. If you’re on the other end of the spectrum and enjoy not having a car payment for a few years, buying may be the better option for you.”