There are a lot of factors to consider when making a purchase or lease, so here's a guide - as simple as we can make it - to help in your decision. First let's consider the pros and cons of leasing:
Advantages
Leasing provides the enjoyment and prestige of driving a newer car more often.
Leasing puts you in a new car that has the latest safety, technology and comfort features.
Warranty coverage. Leasing in three-year cycles means you are always under the manufacturer's bumper-to-bumper warranty.
Tax savings. If you own a business and use your vehicle for business-related travel, there are some considerable tax advantages to leasing.
Lower payments. Leasing generally allows you to drive a new car with a lower payment than conventional financing (more on that later).
Lower maintenance costs. In most cases, you'll never even have to buy tires.
Mandatory GAP insurance covers you in the event your car is totaled, and your insurance doesn't cover the entire payoff. This coverage is provided by the leasing company at no extra charge to you.
Guaranteed Future Value. This largely overlooked feature of leasing gives it a tremendous advantage over financing. Here's why: Every lease in Maine comes with a "Lease End Value" (LEV) which is guaranteed in the lease agreement. Think of it as a guaranteed future value. This is the amount that you're not paying for when leasing, and only comes into play if you decide to purchase the car at the end of your lease. For example, if a $30,000 car has a 36 month 50% residual, then your lease payments would be $416.67 ($15,000 / 36) Your LEV is $15,000. If, at lease end, you don't think it's worth it, you drop the keys off and your done! If, however, it's the nicest car you've ever owned and you want to keep it, or perhaps it's actually worth $17,000, you can buy it for $15,000...and that's guaranteed upfront when you sign the lease. Either way, leasing gives you options that financing doesn't.
Here's an example: Jim is considering a new Outback which he can buy for $27,000 plus tax at an attractive finance rate of 1.9% for five years, which makes his payment $503 per month.
To lease for three years with no money down, his payment is only $371, a monthly savings of $132. The LEV or price that he can buy the car for at the end of the lease is $16,464.
To see if leasing makes sense, we'll compare the total cost to finance - $503 x 60 = $30,180 - with the total cost to lease, then buy - 371 x 36 + $16,464 = $29,820, for a savings of $360. Of course, if Jim finances the $16,464 LEV, the finance charges should be added to get an accurate comparison. One important option that Jim has at the end of three years is dropping the car off and moving on to the next one. If he financed, he'd still have two more years of payments!
While there are many factors to consider when making the lease-or-buy decision, the best place to start is with the numbers. Do your own calculations, factor in the intangibles and the best decision will emerge.
