Leasing a Car vs. Financing

Is it a better deal to lease or buy a new car? The answer to that question depends on the specific situation, but here are a few general guidelines that you can use to determine the best financial approach for selecting your next vehicle.

Value for the Money

When you buy a car, you are paying (or financing) the full retail price of the vehicle. When you sign a lease, you are paying for the expected depreciation on the vehicle for the life of the lease. (For simple math, if you lease a $20,000 car and it is expected to lose half of its value, your lease payments will total $10,000. If you buy the same car, you pay $20,000.) This means that leases allow you to have access to a higher end car than you what you might be able to afford to buy.

Equity

The most obvious benefit of buying a car is that you own equity in the vehicle. When you make payments on a car loan, a portion of the payment goes toward the principal. If you make all of your payments on time, you will own the title to the car at the end of the agreed-upon amortization schedule. With a lease, you own nothing when the lease expires. (One important point to make about vehicle equity: it’s not the same as home equity. If, for example, you have determined that it’s better in your situation to own a house than to rent an apartment, don’t jump to the conclusion that owning a vehicle is automatically better than leasing one. Houses tend to appreciate in value over the long term, whereas cars always depreciate in value.)

Market and Price Fluctuation

Leases are more predictable when it comes to market value, since the amount of depreciation that you are paying for is agreed upon at the beginning of the lease, regardless of market conditions at the time when your lease expires. In other words, if you lease a car, the lessor assumes the pricing volatility risk. When you buy a car, on the other hand, you will have to cover the difference if your car’s market value is less than expected (or reap the benefits if it retains more value than expected).

Mileage

Auto leases restrict the number of miles that you can drive the car. It’s typical for a lease to come with a limit of 12,000 miles per year. If you exceed that limit, you will be assessed a per-mile overage fee. This can add up quickly, especially if you take a lot of long road trips or if you commute a long distance to work. However, many dealers also offer high-mileage leases that can work out to be advantageous in a number of cases. When you own a car, there are no restrictions on mileage.

Taxes

If you use your car for business at least part of the time, you can deduct a portion of your lease payments on your taxes. Leasing a car can sometimes offer distinct tax advantages for this reason. You should consult your CPA or tax advisor about the tax implications of owning or leasing your vehicle if you plan to use it for work.

Maintenance

If you drive home a new vehicle—whether you buy it or lease it—the manufacturer’s warranty will cover all of the major systems, usually for at least three years. Certified pre-owned vehicles typically come with some degree of warranty coverage as well. It’s common for leases to expire before the manufacturer’s warranty runs out, which means that you won’t be paying any significant maintenance costs aside from oil changes and other regular maintenance. Longer leases may extend beyond the warranty period. If you own a car and plan to keep it for a long time, maintenance may become more of an issue after a few years.

Upgrades and Customizations

If you have a desire to customize your vehicle, you will have much more flexibility and freedom to do so with a car that you own. For example, you may want to install an aftermarket stereo system, change the paint color or make any other cosmetic enhancements, a lease will make upgrades difficult or impractical. You may have to reverse any modifications prior to turning in the car at the end of the lease (aside from the fact that you’re paying to improve someone else’s vehicle).

It’s impossible to give a generalized answer as to whether it’s better to lease a new vehicle or to buy one, especially since lease terms can vary widely. Not sure whether a lease or purchase makes the most sense for you? Stop in or give us a call today to discuss the vehicles and options best suited to your needs.





5701 E. Independence Blvd Charlotte, NC 28212
Sales: (888) 703-8351
Service:(866) 306-3293
Fax: (704) 535-8204

Why “Gap” Insurance Is Important

Gap insurance is ideal for new cars, leases and recent-model pre-owned cars. Some car buyers assume that “full coverage” on an insurance policy means an ironclad guarantee that if their car is totaled or stolen, it will be replaced at no cost (other than the policy deductible which is typically $500). Unfortunately, that’s not the case.

Cars are a type of asset that depreciates in value over time. Depreciation is especially sharp during the first few years of a car’s life. When you drive a new or late-model pre-owned car off the lot, the value of your car decreases more rapidly than the balance of your loan. In other words, your debt will likely exceed the value of the car for the first 1-2 years. This condition is referred to as being “upside down.” If you get into a bad accident and your insurance company declares your car a total loss, you will be responsible for paying the difference between the car’s book value and the balance of the loan—which can add up to a hefty amount of money.

Let’s look at a couple of scenarios. Suppose you bought a brand new car for $22,000. You were able to buy the car with $1,000 down and 4% financing with a 72-month loan period. Your payment is $345/month. Six months later, the car is totaled in an accident. Your insurance company pays you $18,300 (based on the current book value of the car) less your $500 deductible ($17,800). Meanwhile, you still owe $19,340 on the loan. The balance of $1,540 comes out of your pocket.

There are a number of factors that can influence the size of the gap between a vehicle’s book value and the amount owed at the time of a total loss. The higher the sticker price of the car, the greater the gap will be during the upside-down period. If you bought the car with zero money down, you will start with a hefty gap. If you financed the purchase with an extended loan period (as in the example above), the loan will amortize slowly—meaning that the “gap” will shrink slowly. Finally, if you were upside-down on your old car when you traded it in (adding the negative equity onto your new car loan), this will also exacerbate the gap in the event of a total loss.

If you are leasing your vehicle, gap coverage is even more critical. One of the primary benefits of leasing a car instead of buying is the fact that you get to drive a higher-end vehicle for a similar monthly payment. That means that the depreciation on the vehicle will add up to a higher dollar figure and a higher “gap” in the event of a total loss. For this reason, many leases require gap insurance and include the cost in the lease payment, but don’t assume that. Make sure to read your lease terms and understand your gap coverage.

Most dealers will explain gap coverage to you, but make sure to ask if your loan includes gap coverage. Unless you are paying at least 20% down on your vehicle, you will most likely need gap insurance.

If you’re in the market for a new vehicle, stop in this week and test-drive one of our Subarus!


5701 E. Independence Blvd Charlotte, NC 28212
Sales: (888) 703-8351
Service:(866) 306-3293
Fax: (704) 535-8204