Leasing vs. Buying Vehicles

Function

While leasing a vehicle finances the use of it, buying a vehicle finances the purchase of it. Leasing enables you to drive a vehicle without owning it, and pay for only that portion of the vehicle that you use over the term of the lease, usually between 2 and 4 years. Buying a vehicle means paying for the entire cost of the vehicle via a car loan and making monthly payments over several years.

Benefits

Down payments need not be made on leased vehicles, and lease payments are about 30 to 60 percent lower than loan payments. A leased vehicle can be returned for a newer vehicle every couple of years, or you can opt to buy it out. Buying a vehicle outright builds ownership equity.

Considerations

Most leases limit the number of miles that can be put on a vehicle during its term, and additional charges may incur if you go over. Additional charges may apply if you terminate a vehicle lease early. Monthly payments are typically much higher for purchased vehicles than those that are leased, and some people find themselves owing more than the vehicle is worth as it depreciates in value over the course of the loan.

Costs

Leasing a vehicle involves up-front costs, such as a refundable security deposit, the first month's payment, registration, taxes and, in some states, a capitalized cost reduction. Buying a vehicle requires a down payment or trading in another vehicle. Sales tax, registration fees and interest rates are rolled into new-car loans, typically over 4 or more years, and consist of principal and interest payments.

Misconceptions

Buying a vehicle before the end of a lease is always more expensive than if the vehicle was bought from the get-go. "Gap" insurance, which pays the difference between a vehicle's worth versus what is owed if it's stolen or totaled, is almost always available in a lease contract but not in a car loan, and is prohibitively expensive if purchased separately. You don't have to buy an extended warranty if you don't feel it's necessary, even if you are pressured to do so by an unscrupulous dealer. It's important to be a savvy and educated consumer before entering into a vehicle lease or loan so that you don't sign up for a bad deal and end up losing more than you bargained for. The vehicle leasing and buying market is full of complicated financing jargon and extra fees that don't make sense, so arm yourself with the facts and figures before you start negotiating with a fast-talking car dealer.