Buyer Question: What is the difference between buying a vehicle and leasing a vehicle.

Comment: When you buy a vehicle, you own the vehicle and you keep it after you payoff the vehicle loan.  When you lease a vehicle you “rent” the vehicle from a leasing company for a specific period of time.  At the end of the lease you return it to the leasing company.

There are two basic types of vehicle leases.

Lease, Closed-End – This lease is also called a walk-away lease. At the end of the lease the lessee pays for any excess wear and tear and excess mileage charges, if applicable, and walks away. The difference between the residual value stated in the contract and the lessor’s appraised value at the end of the lease is absorbed by the lessor.

Lease, Open-End – This lease is also called a Finance lease. At the end of the lease the lessee pays for any excess wear and tear and excess mileage charges, if applicable.  The lessee is also responsible for the difference between the residual value stated in the contract and the lessor’s appraised value at the end of the lease.

Definition of additional lease terms may also be found in the Glossary of Terms (coming soon).

Buyer Question:  Should I buy or lease my next vehicle?

Comment:  It is an individual decision based on weighting both the financial factors and the buyer’s personal use preferences.  The following is an example of a series of personal use preference questions which should be considered when making a lease verse buy decision.  The first set of questions tend to indicate the potential buyer should consider a lease.  The second sent of questions tend to indicate the potential buyer should consider a buy decision.

Personal Use Preferences - Potential Lease Decision

Do you always want to drive a new vehicle?

Comment: Vehicle leases can be setup for the period of time you would like to drive the vehicle.

Do you want to drive a vehicle which is less than 3 years old?

Comment: Vehicle leases are typically for 2 to 4 years. 

Do you want to drive a more expensive vehicle?

Comment: Lease payments for the same vehicle are usually lower under a lease.  Under a lease you are making payments based on the difference between the cost of the vehicle less the vehicles residual value at the end of the lease.  On a purchase you making payments based on the cost of the vehicle. 

Do you always want to drive a vehicle which under warranty?

Comment:  Vehicles leases can be setup for 3 years, the length of a typical vehicle warranty.

Do you want to try a vehicle before purchasing it?

Comment:  At the end of the lease you have the choice of returning the vehicle or buying it for its residual value. 

Do you want to avoid the issues associated with selling a trade-in?

Comment: At the end of the lease you return the vehicle, pay any end of lease charges and walk away.

Do you use your vehicle for business purposes?

Comment: The cost of vehicle leases can usually be deducted for business purposes.  See a CPA or financial planner regarding your specific situation.

Do you always end up “upside down” when you trade-in a vehicle?

Comment: Lease will be better.  If you have a closed end lease you pay the end of lease fees, if applicable, and walk away. 

Do you drive 12,000 to 15,000 miles per year?

Comment: Most leases are setup for 12,000 to 15,000 miles per year. Extra mileage allowance can usually be negotiated at the beginning of the lease for a higher monthly payment.

Personal Use Preferences - Potential Buy Decision

Do you usually customize your vehicle?

Comment:  These changes are not permitted on leased vehicles.

Do you like to upgrade options on your vehicle?

Comment:  These changes are not permitted on leased vehicles.

Do you usually keep a vehicle for 5 years or longer?

Comment: The longer a buyer keeps a vehicle the financial sense it makes to buy the vehicle. Vehicle loans are typically for 4 to 6 years.

Do you tend to be rough on a vehicle?

Comment: Leases usually have excessive wear and tear provisions in the contract.  These charges are due at the end of the lease.

Do you have a less than a stellar credit rating?

Comment: Leases usually require higher credit ratings than purchases.  Under both the lease and purchase options the better the credit rating the better the interest rate.

Do you have little of nothing for a down payment?

Comment: Initial down payment for leases is normally higher than if you purchase a vehicle.  Most vehicle purchases maybe be made with little or no down payment.

Do you dislike constantly making monthly payments?

Comment:  Under the lease option monthly payments are required monthly as a buy transfer from one vehicle lease to another.

Do you drive in excess of 15,000 miles per year?

Comment: Most leases are setup for 12,000 to 15,000 miles per year. Excess miles can cost between 10 to 25 cents per mile.

Lease vs. Buy - Financial Factors

The second part of the lease verse buy decision is looking at the financial implications of both.  The two (2) calculators listed below will help you analyze the lease option verse the buy option.

The following steps take approximately half an hour.

Use the basic lease calculator on the Credit Union National Association Internet site at www.cuna.org to compare purchase and lease options. Click on Personal Finance, Online, Credit Union Calculators, View Credit Union Calculators, Auto, Should I Lease or Purchase?

-or-

Use the basic lease calculator on the Family Credit Counseling Service Internet site at www.familycredit.com. Click on Calculators.

If one or both of the basic lease calculators suggest a vehicle lease is financially viable the buyer should consider purchasing and downloading the comprehensive vehicle lease analysis software from LeaseWizard at www.leasewizard.com.

If the Personal Use Preferences and Financial Factors suggest a buy decision see Financing a New Vehicle.  If the Personal Use Preferences and Financial Factors suggest a lease decision see Leasing a New Vehicle.

Please Visit Our Site Sponsors: