Question: You found your dream car, now — car lease vs. buy: how do you turn that dream into reality?
You’ve got basically five options: 1) Use your savings; 2) Someone buys the car for you as a gift; 3) You win the lottery; 4) You borrow the money, i.e., take out a car loan; 5) You lease (or rent) your dream.
Leasing = Renting.
While renting a car might sound weird, you rent lots of things: your apartment, a tux for your best friend’s wedding, your dog (you do rent your dog, don’t you?). In all cases (unless you rent forever) you have to, sooner or later, give back what you’re renting.
In the case of a car, you need to give the car back to the dealer, either because you don’t need it anymore or you want to start renting a new one
Why Dealers Rent Rather Than Sell Cars
Renting or leasing a car is attractive because monthly lease payments are lower than monthly loan payments. This puts the car more w/in your financial reach. And the cost of the lease has to be less than the cost of a car loan because no one is going to agree to rent a car for the same cost that they could buy a car. But, if the dealer gets less money for leasing, why does he do it?
Well, in the end, the dealer gets the car back. It’s used, of course, but all that time you paid him cash equal to (and probably more than) the difference between the price of the new car and what he can sell it for as a used car.
Sounds Win-Win, But . . . Is It Really a Win for You?
With leasing, the dealer loses nothing and you get a car for less than what you would have to pay to buy the car. Sound win-win . . . or is it?
Advantages of Leasing.
Let’s look at the advantage of leasing.
If you lease a car for 2-3 years and then turn it in for a new one, your rented car will always have the latest new features. Your car never really gets old. But, you pay for that — a serial leaser keeps paying for the newest latest features.
Second, most leases do not run past the warranty. This means if the car breaks down, you don’t have to pay for repairs. And you should have few repairs anyway because the car is basically new.
So, comparing the cost of buying a new car with a car loan verses leasing, the lease saves you money on 1) monthly payments, 2) car repairs 3) and taxes (you pay less tax on a lease than on a loan).
Disadvantage of leasing?
Sounds great, right? One catch: most of these benefits are pay as you go. As long as you keep leasing, you’re ahead of the buyer, but — only for a while. The buyer starts rapidly getting ahead of you once the car is paid off. You’re paying to drive. He’s driving for free. Plus he can sell the car if he wants. He owns it.
Another catch: most lease terms only allow for pre-determined damage. These are “wear and tear” restrictions. If a leased car is damaged in any way outside of the “ware & tear” agreement, you pay. If you own the car, on the other hand, you can choose to live with that bump or scratch. Plus lease agreement usually limit the total number of miles you can drive.
Car Loan or Lease (Rent) – How To Choose?
So which is better? If you need a car for the long term, you’re probably better off taking out a car loan. In the long run, you’ll save money. If you only need a car for the short term (2-3 years), then leasing makes sense as long as the sum total of your lease payments are less than the cost of a loan.
So, all you car leasers out there – why do you lease rather than buy? Let us know in the comment box below!
Update! In the same way that peer-to-peer leading made personal loans truly personal by directly connecting borrowers and lenders, SnapGoods.com has removed the traditional rental middleman and directly connects people who need things (paintball helmets, tanks, etc.) with owners willing to rent those things for a negotiated fee . . . just kidding about the tank.