Differences Between Leasing and Buying
You've decided you want a new car. Should you obtain a loan, lease, or pay cash? There are pros and cons for all three methods. You should be able to make an informed choice about what's best for you based on the operating cost, equity and ownership, and tax and insurance considerations.
Only about 10% of all automobile purchases are in cash. If you pay for the entire cost of your car with cash up front, it's all yours and you don't owe anything on it. However, you won't have that money available for investing, for other uses or in case of an emergency.
Leasing almost always has one very powerful advantage over a loan... lower initial cash outlay. With leasing there is normally little initial cash required in order to put yourself "in the car." Generally, the better your credit rating, the less cash required at the start of the lease.
Usually you will be asked to provide a refundable security deposit, the first monthly payment, and sometimes, at your discretion, a "capitalized cost reduction," or down payment. As with most terms in a lease, these can be structured to meet your needs. No down payment and no deposit leases are Autoflex Leasing's specialty.
When you lease, at the end of the lease, you have no equity or ownership of the vehicle. When you finance your car with a loan, you are gradually building equity as you pay it off. However, you should consider the amount of money that you will have to spend over the total period of the loan in order to build equity. Even though you will "own" the car after making all the loan payments, the value of the car will be worth much less than the amount that was spent in order to obtain it. And even though an asset, it is a continually depreciating one, losing more and more of its value with each passing day.
When you buy a car in most states you have to pay the sales tax up front in a lump sum. With leasing, you can generally amortize or spread out the sales and rental or use tax over the term of the lease.
Leasing can sometimes require higher limits for insurance coverage than what some people carry, for both public liability and property damage (collision and comprehensive). However, no one in this litigious society should ever drive any vehicle with insurance limits lower than the limits required on a lease. These limits are $100,000 / $300,000 and $50,000 collision. Since taxes and insurance obligations do vary by state, know which requirements apply to your situation.
Because of the way leases are structured, the payments can be vastly lower than loan payments. Because of this, you can generally add more options or upgrade to a more expensive model than you could afford with a loan. Also consider how often you want to drive your car. Leases can have shorter terms than loans, so you can usually drive a new car every two or three years instead of the standard four or five year (or longer) length of a traditional car loan.
The popularity of leasing a car has exploded in recent years, with individual consumers accounting for the bulk of the increase. Leasing has grown more than tenfold in less than a decade, and now accounts for more than 35% of the 17 million-plus vehicles sold in the United States.
The ever increasing cost of new vehicles combined with a decline in the disposable savings of Americans and changes to the tax laws are the main causes.
In 1987, more than 70% of disposable savings were available for the purchase of consumer goods. By 1993 that figure had declined to less than 40%. This year, the percentage continues its downward slide.
Additionally, the many tax deductions that favored purchasing over leasing were eliminated. Since those tax laws were changed, leasing has enjoyed a steady increase every year for the last ten years.
Frank Sluter and Paul Doyle