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Auto Leasing & Financing - What are the Benefits and Drawbacks?

Buying: The Benefits
By far the greatest benefit of buying a car is that you may actually own it one day. Implied in this benefit is that you'll one day be free of car payments. The car is yours to sell at any time and you are not locked into any type of fixed ownership period.

When you buy a car, the insurance limits on your policy are typically lower than if you leased. Finally, by owning a car, you're free to rack up the mileage without economic penalties or restrictions.

Buying: The Drawbacks
The most obvious downside of owning versus leasing is the monthly payment, which is usually higher on a purchased car. Additionally, the dealers usually require a reasonable down payment, so the initial out-of-pocket cost is higher when buying a car.

Presumably, as you pay down your car loan, you have the ability to build equity in the vehicle. Unfortunately, however, this is not always the case. When you purchase a car, your payments reflect the whole cost of the car, usually amortized over a four- to six-year period. But, depreciation can take a nasty toll on the value of your car; especially in the first couple years you own the vehicle. More and more, as car prices escalate, buyers who give modest down payments end up financing a considerable portion of the car, and then find themselves in an "upside-down situation" where the car is worth less than what the buyer pays to own it. Like the monthly payments of a mortgage, monthly car payments are divided between paying principal and interest, and the amounts dedicated to each vary from payment to payment. In the first years in which you pay back your car loan, the majority of each payment goes towards interest rather than principal. But in the first couple years after being purchased, most new vehicles depreciate 20-40%. The loss in equity is a double whammy: your car depreciates dramatically, and the monthly payments you've been making have mostly gone towards interest rather than the principal, which leaves you very little equity in the car.

Leasing: The Benefits
Perhaps the greatest benefit of leasing a car is the lower out-of-pocket costs when acquiring and maintaining the car. Leases require little or no down payment and there are no up-front sales-tax payments. Additionally, monthly payments are usually lower, and you get the pleasure of owning a new car every few years.

With a lease, you are essentially renting the car for a fixed number of months (typically 36-48 months). Therefore, you pay only for the use (depreciation) of the car for that period, and you are not forced to absorb the full depreciation cost of the vehicle. Leasing a car will never put you in an upside-down position.

Leasing also provides an alternative when buying a car is not an option. Most banks will not lend more than $30,000 for a car loan. If you are planning to acquire a car worth more than that, leasing may be your only option.

Finally, for business owners, leasing a car may offer tax advantages if the vehicle is used for business purposes.

Leasing: The Drawbacks
By leasing a car, you always have a car payment, and if you don't like that prospect, then leasing is probably not right for you. As long as you lease, you never really own it. However, depending on your type of lease, when your lease term is up, you either hand the keys over to the car dealership and look for another vehicle, or finance the remaining value of the vehicle and go from making lease payments to loan payments.

The mileage restrictions of leasing pose another drawback. If you drive a great deal during the year, consider instead a loan or an open-end lease (which we discuss below). Most leases restrict your mileage usage to 15,000 miles per year (sometimes even lower at 12,000 per year). If you go over your allotted miles, you pay extra: the going rate is about 15 cents for every mile over your limit, and 20-25 cents for luxury cars. So, if you go over, say, 4,000 miles on your luxury sedan, you can expect to pay about $800 at the end of the lease. One way to reduce mileage is to use auto transport services.

Finally, insurers usually require higher coverage costs for leased vehicles. However, depending on your age, driving record and place of residence, that additional cost may be nominal.

Get an online quote for car leasing and independent vehicle finance from Seaton Automotive

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