Lease or Finance?

With the prices of new cars increasing faster than our paychecks, and with the demise of tax deductions for interest paid on car loans, more people are considering leasing than ever before.

When you buy a new car, you may finance part or all of the purchase price and pay x dollars for x months. When the last payment is made, you own the car. When you lease a car, you basically rent it on a long-term, month-to-month basis, paying x dollars for x months. When the last payment is made, you either turn in the car or exercise an option to purchase it at a predetermined price (residual value). The leasing payments are based on the depreciation of the vehicle over the period of the lease, plus interest and fees. The less a vehicle depreciates over time, the less your monthly lease payments will be. Therefore, there are certain makes of cars that are better candidates for leasing than others. According to USAA, the following makes have high residual values, and consequently depreciate less: Acura, BMW, Honda, Infiniti, Jaguar, Lexus, Mercedes and most Toyota models.

Leasing is best if you like to keep a new car about three or four years. If you plan to keep the car five or more years, buying would probably be more economical for you. If you drive more than 12,000 to 15,000 miles per year or trade cars every year, leasing may not be right for you. Also, if you are hard on cars, you will be charged for excessive wear and tear at the end of your lease.

Assuming that you intend to keep your car for four years, you can calculate the approximate cost of leasing versus buying in the following manner: (you will have to obtain these costs from an auto dealer or leasing company and your credit union)

Leasing Buying
INITIAL COSTS
Security Deposit _______________
First monthly payment, if required _______________
Cap cost reduction (downpayment), if applicable? _______________ Downpayment (some credit unions provide 100% financing) _______________
Sales tax, tags, registration? _______________ Sales tax, tags, registration? _______________
Use Tax (MD) _______________
Insurance _______________ Insurance _______________
ONGOING COSTS
Monthly payment _______________ Monthly Payment _______________
Insurance _______________ Insurance _______________
Estimated monthly maint. & repair _______________ Estimated monthly maint. & repair not covered by warranty _______________
Costs not covered by warranty _______________
Property taxes, if applicable _______________ Property taxes, if applicable _______________
FINAL COSTS
Excess wear charges, if applicable _______________
Excess milage charges, if applicable _______________
Disposition charge _______________
TOTAL _______________ TOTAL _______________

The security deposit is usually refundable at the end of the lease. However, the disposition charge (to ready the car for resale) is usually the same amount or slightly higher than the security deposit. If you plan to buy the car at the end of the lease, you will pay a purchase option fee.

In Virginia, personal property taxes are due on the vehicle. However, if a Virginia resident leases a Mercedes or Infiniti, the lessor often will pay the taxes for the term of the lease.

Experts say, one way to avoid excess wear charges later is to keep regular maintenance records, including oil changes every 3,000 miles or so, inspections and minor repairs.

Leasing has become favored by businesses because of the tax breaks (deductions) it offers them. If you are not self-employed or if the car will not be used for business purposes, leasing becomes an expensive financing alternative because of higher (imputed) interest rates. The higher rates are due to low downpayments and higher risks for the lenders. And, remember, you own nothing at the end of the lease term.

Once you have weighed the advantages and disadvantages of leasing, and it's clear you can't or don't want to buy the vehicle, shop around for a "consumer friendly" lease and read the contract carefully before signing.