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By Luigi Fraschini
Millions of consumers would like a simple answer to the question, Should I lease or buy my next car? In the economic doldrums, when the drive to save every dollar is more urgent than ever, getting an answer to this question seems increasingly important. But after examining the most recent statistics and trends, we’re sorry to report that there is no one correct answer. Making the right decision is a matter of your personal situation, values, financial status and desires for the future. OK, it sounds existential, but it’s true.
Car leasing has been around for decades, and it once offered small-business owners significant tax advantages. Leasing really caught fire in the heady mid-2000s, an era of easy credit and a booming economy. Manufacturers used special lease deals to promote their vehicles. And with low monthly payments, leasing offered eager car buyers a form of acquisition that captured as much as 30 percent of the new-car market.
One of the key advantages of leasing is you need relatively little cash to initiate a lease. Let's say you don't have much money in the bank and have no trade-in car, but you have excellent credit. You can walk into your local dealer, sign on the dotted line for a lease and drive out in a new car pretty easily. If, on the other hand, you want to buy that same car, you might have a tougher time. Leasing also allows you to structure the lease term to match your trading cycle. If you normally purchase a new car every two years, you may be better off with a two-year lease.
Leasing also works to the advantage of those who don't know what to do with their car when the time comes to get a new one. You don't have to weigh the advantages of trading it in at a dealership versus selling it yourself, and you don't have to go through the selling-it-yourself hassles of running want ads and meeting with prospective buyers. You don't even have to decide when to do all this. It's spelled out in the lease contract. You either take the car back to the dealer and wave bye-bye, or you pay the dealer (or finance company) the amount specified in the lease agreement at the time the lease is established, and you keep the car.
And of course, the biggest reason for the popularity of leasing: The fact that for the same monthly payment, you can lease a significantly more expensive vehicle than you can buy. Why? Because you’re paying for the use of the car, not the car itself.
So what are the downsides? When you lease, you don’t own the car -- and the finance company that does wants you to take really good care of it. That means you must maintain the car, insure it and limit the miles you put on it. If you don’t, you’ll face serious financial penalties.
Compared to the numerous advantages of leasing, there’s only one key advantage to purchasing your next vehicle. As you make payments, you build equity in a real asset. For most people, this one advantage of buying far outweighs all the advantages of leasing. Sure, by owning a car, you have to put up with the hassles of maintenance, upkeep and repairs, but you're also building equity in an asset for yourself and your family. When you purchase a car, you (not a financial institution) take the risk on the value of the car at the conclusion of the financing term. And for this risk, you are very often rewarded. Your payments will cease, and you have a car you can drive for months, if not years, payment-free. And studies show that driving your car until it essentially has no resale value is the most cost-effective arrangement.
So even in this economic climate, when manufacturers are trying to outdo each other by offering truly phenomenal lease deals, most buyers will still find that buying is their better bet. But leasing still has its place.
Luigi Fraschini Driving Today Contributing Editor Luigi Fraschini writes frequently about the financial side of the car-purchase process
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