Leasing vs. Buying a Car
Knowing the tricks makes you a better decision-maker
There are many reasons for you to lease a car versus buy a car, but too often it is the auto dealer’s profit motive that determines which method you use rather than what’s best for your budget and lifestyle. To help you make an informed decision, here are some things to consider:
When to lease
- You want a car with lower down payments and monthly costs.
- You don’t like making your own vehicle repairs.
- You prefer a new car every couple of years.
- You don’t drive many miles each year.
- You are not hard on your vehicle.
When to buy
- You plan to have the vehicle for many years.
- You are willing to drive a used car.
- You drive more miles than a lease allows.
- You are worried about keeping the car in excellent condition.
- You want to work on or modify the car.
Tips to know if you decide to lease
If you think leasing a vehicle is an option for you, here are some tips to ensure you are making the best deal:
- Negotiate before revealing your intentions. Negotiate the price before telling the dealer you wish to lease. The purchase price you negotiate should be the price the dealer uses in calculating the lease payments as well as an outright purchase. If it is not, this technique forces the dealer to disclose this fact.
- Ask about the annual percentage rate (APR). Ask the dealer to disclose the effective APR built into the lease. If the dealer gives you a lease factor instead of an interest rate, multiply the lease factor by 2,400 to get a general interest rate. For example, a lease factor of 0.0025 multiplied by 2,400 returns an interest rate of 6 percent.
- Question the residual value. Ask what the projected residual value of the car is at the end of the lease. This value is often overstated by the dealer to artificially lower your lease payment, but can impact your ability to purchase your vehicle at the end of the lease. Future residual value is an estimate and can often be negotiated with the dealer.
- Compare with a loan. Use the negotiated purchase price to calculate your loan payments. Use this information to compare your monthly lease payment with your car loan payment.
- Read the lease agreement! If ever there is a time to read the fine print, leasing a car is one of them. Pay special attention to early termination clauses and cost for excess miles. These two factors can dramatically impact your lease versus buy decision.