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Cars: Buy or Lease?


It’s a question nearly as old as consumer finance itself. Heck, Ben Hur might have been counting miles going around the chariot race track, worried about excess mileage charges while fending off gladiators.

When it comes to vehicles, which provides the better value? Well, I lean towards the outright purchase, 95 percent of the time, for individual consumers. But a quirk in the law makes things a little different for some military families. You won’t hear about that on CNN!


The Basics

Let’s break things down to the nuts and bolts:

A purchase is easy to understand: You pay your money, the dealership transfers the title. If you pay cash, the dealership transfers the title to you. If you use a finance company, the dealer transfers the title to the finance company while you make payments. But you have no further obligation to the dealer (unless you buy a warranty from them that requires regular service).

A lease arrangement, on the other hand, is essentially a rental with a commitment. You agree to make payments for a certain amount of time. You also agree to maintain the car via the dealer’s authorized service centers, and return the car at the end of the lease. If you drive too many miles, it means the car will be worth less than the dealer projected, so you may have to compensate for that with an excess mileage fee. Alternatively, you can buy the car outright. The dealer writes the contract, so they make sure they do ok, either way.

You? Not so much. But if cash flow is tight, and you aren’t handy with cars, or you have a wife and children on the road and you’re not comfortable with a clunker, then you might find making lease payments a little easier than a full car payment. But be sure to economize elsewhere. You don’t want to fall into the trap of leasing forever because you have no other options.


Advantages of Buying

There’s little doubt that outright ownership is cheaper in the long run than leasing, in the vast majority of cases. Here are the major advantages of making an outright purchase:

  • No mileage charges to worry about.
  • No worries if the kids spill Kool-Aid on the back seat.
  • You own the car, free and clear. That means you also get to sell the care when you’re done with it, either as a drivable used car or for salvage value. It may seem like a long way away, but this is a big deal. There’s a reason why dealers want cars back at the end of the lease term – they get to sell them again, either to you or someone else.
  • Your payments will end someday. They’ll end now, if you pay cash.
  • Interest is zero, once you pay the debt off. Some dealers may offer zero percent financing on new cars for those with good credit. But think about it: Money ain’t free. They’re making up for it somewhere, somehow.
  • Cash gets peoples’ attention. And frequently gets a discount if you ask the right person. If you can pay cash, you’re a no-hassles customer. The dealer doesn’t have to worry if you qualify for financing.
  • Factory warrantees are more robust than they used to be. Years ago, one of the big attractions of leasing was ongoing service. If your leased auto went kaput, the dealer had to repair or replace, and provide you with a loaner in the meantime. Now, with factory warrantees extending out to seven years in some cases, it’s less of a selling point, depending on the car.


Leasing Advantages

  • Lower monthly payments: You’re only making payments to offset the expected decline in the car’s resale value during the time of the lease, plus a dealer profit margin and taxes. You aren’t paying for the entire car.
  • You can invest the savings.
  • Have a business? Is the car for business purposes? The IRS lets you deduct the entire value of a lease against earnings as a business expense. If you purchase the vehicle, you have to spread that deduction out over 5 years or so, under MACRS rules. However, this isn’t a huge deal: You can also get a very substantial deduction on outright purchases, using Section 179 of the Internal Revenue Code. Ask your accountant for help in making the most of that deduction. But remember: It only applies to businesses – not to individuals. If all your income is on your LES, you won’t qualify.


Reservist? National Guardsman?

For all of the long-term advantages of owning, there are some special rules that apply to reservists and Guard members that may tilt the needle towards leasing: The Soldiers and Sailors Civil Relief Act allows you to cancel leases in the event you are called to active duty. The callup need not be involuntary. If you are not on active duty, you lease a vehicle and then you get your orders, you can drop off your vehicle, and the dealer has to cancel your lease.

If you are expecting orders to go on active duty soon, it may make better sense to drive a leased car for a period of time, rather than making payments or tying up cash on a vehicle sitting in a parking lot somewhere you don’t even get to drive.

It may also make sense for active duty service members who don’t want the hassle of shipping their car, or having to maintain a car during a deployment. Just time your lease expiration for right before you ship out.

Again, this isn’t a financially optimal strategy. Eventually, the costs of leasing will overwhelm the costs of outright ownership, in the vast majority of cases.


Insurance

What happens if you wreck the car? Well, you have to buy it! It’s not the dealer’s fault you wrecked the car. In practice, though, it’s almost invariably your insurance company who writes the check – minus your deductible.

But remember – the value of the car is a very different figure than the amount you owe. It is very common to owe more on the car than it is worth – a condition known as being “upside down.” The insurance company will replace the car – not pay it off.

To get protection against having to pay the loan payoff amount out of pocket, you need to consider “gap insurance.” This is a separate coverage or rider you have to elect. So don’t get blindsided after you get rear-ended!


Contributed by Jason Van Steenwyk

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