Should You Buy or Lease Your Next Car?

Buy or Lease a new car.jpg
Does it make more financial sense to buy or lease?

It would be easy to tell you to take the bus or keep your junker for another 140,000 miles, but that’s not realistic. You’re going to need a new car at some point, so you need to answer the question: should you buy it or lease it?

To determine whether you should buy or lease, answer these two simple questions:

1. How many miles do you drive per year?

In most leases, you are allowed to drive only 10,000 to 15,000 miles per year — 40,000 to 60,000 miles on a four-year lease. Anything more will cost you up to 25 cents per mile. As a result, unless you are among the relatively small number of people who drive fewer than 10,000 miles a year, it will be cheaper for you to negotiate a more expensive lease with a higher mileage limit than for you to pay 25 cents for every mile over the limit you drive. If you know you’ll drive significantly fewer miles than 10,000 to 15,000 per year, you can negotiate a lower lease payment.

2. How long do you keep your car?

Leasing is best for people who keep their cars for four years or less. At the end of the lease, you must turn in the car and get a new one, with a new lease or purchase contract. Thus, if you like to keep cars for seven or eight years, you’ll find that, over the long run, leasing is much more expensive than buying.

Three Money-Saving Tips When Leasing

As with most financial transactions, success or failure often lies in the fine print. Here are three items to keep in mind:

Money-Saving Tip #1: Make Sure You Have Gap Insurance

This is perhaps the single most important — and most overlooked — element of leasing.

Say your contract says the car’s residual value at the end of the lease will be $15,200, but the car’s actual value will be only $10,000. If you wreck the car three months before your lease expires, the insurer will pay the dealer (who owns the car) the actual market value, which is $10,000. However, your contract says the residual value is $15,200. That means you are responsible for the other $5,200.

This “gap” between the lease contract’s stated residual value and the car’s actual value has caused many lessees to incur huge losses due to accidents.

The solution: make sure your lease contract includes “gap insurance” — even if you have to pay extra for it, for being without it is like driving without insurance.

Money-Saving Tip #2: Avoid the Cap Cost Reduction

When someone buys a car, the more money he puts down, the less his monthly payments. Similarly, to lower your lease payments, you can make a cap cost reduction, which is a large, one-time payment made at the start of the lease.

Remember that when leasing, you do not own the car. Thus, if you make a cap cost reduction, you are making a down payment on property that is not yours. Never do that — you are just throwing your money away.

Money-Saving Tip #3: Never Buy Optional Equipment in a Car You’re Not Buying

When leasing, you must keep in mind that you don’t own the car. That means you must be careful when agreeing to options that the dealer offers you. Take Carmen, for example. She worked out a fine deal on a car — $250 per month for 36 months, with no cap cost reduction. However, she then decided to have the dealer install mats, fancier rims and a navigation system. The cost of all these items came to $1,800, so the dealer added $50 to the monthly payment.

Dumb move, Carmen.

What she should have done is incorporated the cost of the options into the overall price of the car, and then negotiated the lease price. That way, she’d be renting the options along with the rest of the car.

Since cars are one of the largest purchases you’ll make, talk with an Edelman Financial Planner before you decide whether to buy or lease, how much to put down, and whether or not you should finance. The right decision can save you thousands!

Advisory services offered through Edelman Financial Services, LLC. Securities offered through EF Legacy Securities, LLC, an affiliated broker/dealer, member FINRA/SIPC.