Buy vs lease

Buying vs. Leasing Your Car: Questions to Ask

Knowing your preferences and habits makes it easier to choose the best financing option

If you’re preparing to pay thousands of dollars for a new car, it is fair to assume that you’re asking plenty of questions. Get ready to add a few more to the list.

Are you going to be among the approximately 80 percent of car buyers who purchase their vehicles or make up the roughly 20 percent who prefer to lease? By answering the following questions, you can determine which car financing option is best for you.

Q: Can I make a down payment on my lease or loan?

A down payment is applicable to both a lease and a loan. Larger down payments typically translate into smaller monthly payments. But if you arrive with no down payment or a small one, a lease is a better option for you because the down payment is negotiable.

Look closely at the finer details of lease promotions that promise low monthly payments. They usually require a sizable down payment at signing. Without thousands of cash upfront, plan for a larger monthly lease bill.

Q: How many miles do I typically drive my car in a year?

If you’re sure that you log more than 15,000 miles a year on the road, buying is the better choice. Leases typically come with mileage restrictions of 9,000, 12,000 and 15,000 a year. Driving in excess of these limits will incur a fee per mile at the end of the lease, which can be very expensive. Mileage is a critical factor with leased cars because they are sold as used or certified pre-owned when the lease period ends, and the value of the car is determined, in part, by how much it was driven.

Q: How much do I want to spend per month?

With a lease, it’s often said that you get more car per dollar. A lease payment is less than with a loan because you are not financing the entire cost of the car. Instead, you’re only paying for the future depreciation of that vehicle. For example, on a $40,000 car, you’d finance the entire $40,000 purchase price with a car loan. With a car lease, you only pay a percentage of that. The car’s predicted future value is what it is expected to be worth at the end of the lease, which is its residual value. The residual value is subtracted from the purchase price and what’s left over is what you make payments on. So if the car’s residual value is 55 percent after three years, for example, that means the $40,000 car would be worth $22,000 at the end of the lease. You’d make lease payments on the remaining $18,000 and not the full $40,000, plus interest, taxes and fees. Keep in mind, however, that leases may demand higher insurance and maintenance costs.

Also, at the end of a lease, you turn the car in and walk away, much like ending a rental agreement. You don’t own anything, and you’ve accrued no equity in the vehicle that you can sell or trade-in.

Q: Do I love the newest stuff?

If you want a new car every two to three years, then you should lease. Withstanding the dramatic depreciation of a new car purchase every time you drive it off the lot can be avoided with a lease, which normally lasts three years. You enjoy the standard new car warranty service and are only responsible for good car maintenance and service visits. Just don’t customize the car or try to upgrade too soon. A leased car belongs to the leasing company, so no new rims or personalized touches. And if you end a lease early, early-termination charges can make the whole deal cost prohibitive.

Q: Do I have good credit?

Less than stellar credit may make the choice for you. Lease providers typically require better credit ratings for people who want to lease rather than finance the purchase of a car. If your credit score needs improvement, a better option may be to purchase a used or less expensive car.