Lease Or Buy A Car?

With new car prices driving steadily upward, you may be wondering whether to lease or finance your next set of wheels. The best route to take could depend as much on your driving habits as on your finances.

When To Steer Towards An Auto Loan
Take the case of Frank Burton. After five years, 80,000 miles, and one fender bender, Frank was ready for a new car. A quick trip to the library showed him the dealer cost and list price of the car he wanted as well as the value of his used car. He also discovered that financing made sense for him for three reasons: he could use his existing car for a sizeable trade-in, he drove his cars for more than three years, and he averaged over 15,000 miles per year.

When Leasing Is The Right Route
On the other hand, leasing made sense for Glenn Elliot. Glenn needed a car primarily for city driving and knew which car he wanted. But he also knew the monthly payment on a purchase would exceed what he could comfortably afford, and one major repair would put his finances in a deep pothole.

Under a lease, he would pay the agreed upon price, less the car's estimated value at the time the lease ended. In his case, the $30,000 new car was expected to be worth $18,000 at the end of a three-year lease. So, he would only pay $12,000 (plus fees and taxes) over a three-year period to satisfy his driving ambition. Many new car leases also include a bumper-to-bumper warranty (not including regular wear parts like filters, spark plugs and oil changes) good for three years versus certain mileage accumulations.

At the same time, canceling a lease can be costly, and if the car is totaled or stolen, the insurance might not cover the full amount of the remaining lease payments. In cases where insurance is not comprehensive, gap insurance may be the answer for covering the difference. Also, at the end of the lease, Glenn would be responsible for any unusual wear and tear plus excess mileage (most leases are based on 12,000-15,000 miles per year). Most importantly, at the end of the lease, Glenn would be faced with buying the car or leasing a new one---either way, his auto payments would continue.

But, a lease enabled Glenn to drive away with a monthly rate he could afford, approximately 30% less than he would have paid under a loan. His city driving would likely not exceed the pre-set mileage limits, and he had a garage at home to protect the car from too much wear and tear.

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