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Buy or Lease? A Guide for Car Shoppers

Insights & Ideas Team •  August 3, 2016 | Home and Family, Your Finances

Rob and Janet Reinhoffer have tried different styles of car ownership. For many years, the couple purchased their vehicles but switched to leasing on the advice of a neighbor in the automotive industry a few years ago.

“I always felt I wanted to own something, but if you really do the math and consider what you’re getting out of it, leasing makes a lot of sense,” said Rob Reinhoffer. “It’s just really the realization that, as an asset, cars depreciate.”

Leasing is equivalent to renting and usually involves a new car, although you can also lease used cars. The consumer signs a contract for a fixed period of time (usually 24 to 39 months), makes payments and then returns the car at the end of the lease.

Jim Tolkan, president of the Automobile Dealers Association of Mega-Milwaukee, says leasing is on the rise, but there are several things to consider when weighing whether to buy or lease. First is the break-even point of about five years.

“If you’re going to buy and want it to be less expensive than leasing in the mid-term, you really have to own the car about five years,” says Tolkan. “That’s about the time frame when the loan will be paid off or almost paid off; and from then forward, if you keep the car for another five or six years, it will be significantly less than always having a lease payment. On the other side, you would have to weigh costs associated with routine maintenance or repairs.”

However, if you anticipate that the vehicle will be in your possession for less than five years, you might consider leasing, which typically involves lower monthly payments but also has a cap on the amount of total miles you can put on the car. Reinhoffer’s family mostly drives locally and has never had an issue with going over the mileage. He says he enjoys other perks of leasing.

“It’s nice knowing you have the latest safety features and it’s new and reliable.”

Buying and leasing both have advantages and disadvantages. Here are some of the major ones to consider:

Leasing

  • Pluses: You’ll usually have a lower down payment and monthly payments, can pick out a new vehicle with the latest gadgets every two to three years and won’t spend as much on maintenance (most repairs are still under factory warranty).
  • Minuses: The cap on mileage is usually between 12,000 and 15,000 per year. If you go over, expect to pay up to 25 cents per mile, depending on your lease agreement. Also, getting out of a lease contract can be tricky if your lifestyle and automotive needs change.

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  • Pluses: It’s yours to do with what you will, and you can get something back when you sell it. You will also pay less in the long run. “Over a long period of time, buying will be less expensive,” says Tolkan.
  • Minuses: You don’t get to test it out for a few years and then return it, as you do when leasing; you won’t get a brand-new car every few years; and your down and monthly payments will typically be higher.

The decision can also depend on your income and stage of life. People who don’t have much capital to put in a down payment might want to think about a lease. Tolkan feels leasing could also be a perfect fit for your teen driver, rather than buying him or her a more worn-in car.

“You can lease a compact car in many cases for less than what it would cost you to buy an older, used car. It could be less than $200 per month with very little or nothing up front. I think that’s a very, very good alternative,” he said.

This would also eliminate virtually all of the maintenance and repair costs associated with an older automobile and ensure that your teen driver is in a new, safe vehicle.

If you do lease, you usually have the option to buy the car at the end of the lease if you’ve fallen in love with the vehicle or have gone significantly over the mileage. If you get in an accident while leasing, all repair costs are still your responsibility. Leasing contracts do fluctuate. The monthly payments are calculated using a formula that factors in what you’re acquiring the vehicle for, the interest rate at the time and what the dealer anticipates the automobile will be worth at the end of the lease.

“Those numbers change, but they’ve been very, very favorable (for consumers) over the last three or four years,” says Tolkan.

Reinhoffer is happy with his decision to try leasing. “It’s just easier on my cash flow,” he summed up.

However, If you plan to be in your car for at least five years and you want unlimited mileage, buying is probably for you. With the quality of today’s cars, you should be able to get at least several hundred thousand miles out of your car with proper maintenance.

Whichever route you go, Tolkan advises to look out for the best deals at the end of the calendar year first, followed closely by mid-August through October. These are both times manufacturers and dealers are trying to move last year’s models.

As for Tolkan himself, he and his wife own one car and lease another because they each have different automotive goals. Sometimes what makes sense for one family member does not for another. Shop around, keep an eye out for deals and do your homework.

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