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Car Buying Tips: Lease vs Purchase on a New Car

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Author: J.D. Rucker

There are several factors to consider before deciding whether to buy or lease a vehicle. Driving habits, buying habits, manufacturer incentives, and vehicle rates and depreciation are the primary factors, but there are others as well.

-- Driving Habits --

This is the easiest qualifier. Every car finance company, whether it is the manufacturer's division such as Ford Motor Credit, a specialty lender like Wells Fargo, or a personal bank or credit, has multiple lease and purchase programs available.

Determine your mileage habits, taking into consideration travel plans, potential job or housing changes, and anything else that may make you drive more or less than you normally do. Once you have an idea of how many miles you will likely be driving over the length of the lease, find out if there are plans to match.

If there is a good chance that you will go over in miles, leasing is not the best option. If you will not be going over, continue to the next factor. Driving 10k miles per year does not automatically make leasing the best option.

-- Buying Habits --

Over 65% of Americans between 25-45 years of age change vehicles every 2-4 years. The finance companies know this, which is why most offer lease terms that fall into this range. Some go longer.

Leasing is freedom and prison at the same time. While it allows a consumer the opportunity to get out of one low mile vehicle and into a no mile vehicle, it also locks a person into the terms. Once you're in, it's hard and/or expensive to get out. Trading is difficult until a few months before the term ends.

If you are sure you want to change vehicles every 2-3 years (and you have leasing "driving habits") then leasing is potentially the better option. If you keep your cars for four years or longer, that doesn't necessarily mean you shouldn't lease.

When GM started their SmartBuy program, it took a lot of heat from consumer advocacy groups because it was a lease that seemed like a purchase. Terms such as "balloon payment" and "due at Lease End" became synonymous with "SCAM".

In reality, this is a method of "buying" more vehicle than a person's payment range would normally dictate. As an example, a recent promotion by Lincoln offered their luxury MKZ for $0 down, $0 due at signing, $0 first payment, and $399 a month payments on a 39 month lease.

A standard loan of 72 months at a low 2.9% on a $35,000 vehicle would be over $500 per month. If a consumer wanted to purchase this MKZ at Tulsa Lincoln Dealers and had great credit but didn't like the high payments, they could lease it for 39 months. After the lease, they could finance the balance and still be under $400 per month.

This is NOT the recommended way, but for those with "steak taste on a burger budget" it is an option.

-- Manufacturer Incentives --

The vast majority of automotive lenders like to keep a mix of leases and purchases out on the road. Too many leases cause the manufacturer to lose more money when the vehicles are turned in because residual values are normally higher than actual cash values. In other words, what the manufacturer thought a vehicle should be worth in 3 years (residual value) is normally higher than what they actually bring at the program car auctions (actual cash value).

Still, they want a certain number of leased cars on the road for several reasons. In the long run, leases bring the manufacturers and their dealerships more money because of higher owner loyalty, improved likelihood of proper vehicle servicing, and a better chance of selling more expensive, higher profit vehicles.

All of this computes into a nice ebb and flow of incentives offered. There will normally be incentives for both financing and leasing a vehicle, but whichever way the finance companies want consumers to lean for that particular time period is the option that will have the better incentive. Look at both options and see which feels better.

-- Vehicle Rates and Residuals --

Some vehicles are good for leasing. Others are not. The two most important factors (and often the hardest to understand) are rates and residuals.

The lower the rate, the less an owner will end up paying. Seems simple, but when comparing different makes and models, a lower rate might also signify a lower residual. If this is the case, any savings a consumer gets from the rate are wiped out by the lower residual.

The residual value in a lease equation is the amount that the finance company believes the vehicle will be worth at the end of the lease if it is within the mile limit, mechanically cared for and without damages. The higher the residual, the lower the amount financed, and thus, the lower the payments.

For example, if a $30,000 vehicle has a 50% residual for three years, the buyer is basically getting a $15,000/36 month loan. If the residual for that vehicle was 40%, the buyer would be paying for 60% during that time, so they would be getting an $18,000/36 month loan.

It is sometimes difficult to follow the math, but the concept is simple. The higher the residual, the less a buyer will be paying during the lease. Consumers who are true "leasers" who will be switching vehicles at the end of the term should look for higher residuals. People who are leasing to get the low payments and plan on getting a loan for the balance at the end of the lease shouldn't be too concerned about residuals because whether they're paying 60% now, 40% later or 50/50% now/later, they are still paying for 100% of the car in the long run.

Vehicles for 2007 who had the best residuals in their class include:

Volkswagen Rabbit, Toyota Camry, Toyota Avalon, Pontiac Solstice, Lexus IS 250/350, BMW 6 Series, Honda Odyssey, Land Rover Range Rover Sport, Jeep Wrangler, Toyota 4Runner, Mercedes GL Class, Toyota Tacoma, GMC Sierra/Chevrolet Silverado

Imports generally have higher residuals than their domestic counterparts. Automotive Lease Guide lists the following as the best manufacturers for leasing:

1 Honda 2 Toyota 3 Subaru 4 Volkswagen

-- Final Thoughts --

One final plea - buy used. There are great sites where consumers can buy a car online, such as Los Angeles Used Cars, where a consumer can shop thousands of cars that match their criteria. Still, if a customer wants new, they should get new.

Leasing and buying each have distinct advantages over the other. The best thing that a consumer can do to decide is to look at the entire circumstance, research possibilities, apply the previous ideas to the equation, and then pick what is best for their situation. Knowledge is a buyer's (or leaser's) best friend.

I hope it helps.

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