Lease or Buy...Which is right for you?

I have been asked many times if leasing or buying is the better option.  Well here is the definitive answer….it depends!  How do you like that?!  As with most things, you need to dig deeper to see which one is truly the best option for your situation.  This will be a brief discussion on the important areas to consider. 

Miles Driven – This might seem like a funny place to start, but you need to know how many miles you drive in a year and if that number will be consistent for your lease term.  Most leases will offer a 12,000 or 15,000 miles per year option.  The higher mileage option will cost more because the residual value will be lower.  If you take the lower mileage option and go over, you will have to pay a penalty for each mile over the allowed amount.  This can range from 15 cents to 75 cents or more depending on the brand. 

Timing – How often do you get a new car?  If you like to get a new one every few years, then leasing is probably the better option.  If you keep a car for 4+ years, then I would buy the car.  The reason for this is that depreciation is greatest during the first couple years.  After that, it levels off. 

Job Security – It’s important for either option, but more so for leasing.  If you’re buying a car, you can simply sell or trade it if your income changes.  A lease is a binding contract and you’ll have a difficult time transferring the lease.  There are sites that facilitate the transfer (swapalease.com is one example), but you still need to have another person agree to take it.  If you job situation is unsure you should probably lean towards buying (or staying with your current car) until you’re on firmer ground.

Customizing – Do you like to personalize your cars?  A leased car isn’t really yours, so you can’t do anything to it.  If you do customize it, you’ll need to return it to the original state or be charged a significant fee for the dealer to do the work. 

Credit Score – It affects almost everything you do and especially when it comes to buying cars.  Leases require an above average credit rating, so if your credit score isn’t so great, then you’ll need to look at buying your car.  Check with a couple different dealers, but you may pay a higher rate (money factor) similar to your higher interest rate.

Insurance Costs – A lease contract will tell you what levels of insurance you need to carry.  It is closer to full coverage and that will cost you more if you typically carry the minimum coverage.  If you can’t afford the higher insurance rate, then buy the car.  But you should still have good replacement coverage!

These are just a few areas to consider and weigh before you buy or lease a car.  Be sure to analyze all of the numbers and not just the monthly payment.  Buying will have a higher payment, but you will also have an asset once it’s paid off.  When you’re done with the lease, you simply turn your car in and find another one.  You won’t have any value at the end or trade-in value to put towards your next car.  Before leasing, be sure to read last week’s entry for a more detailed description of the leasing process and then make the decision that is best for you and your situation.