Should I Lease or Should I Buy?

By Natalie Josef, December 6, 2010

This weekend, we visited a Honda dealership where my partner's uncle, Pete, works. We had been without wheels for a week since our car had been stolen and we were nearly out of our minds. We came to look at a 2007 Honda Civic Hybrid. We had done all the research, crunched the numbers, and had decided this was going to be our new car.

When we get to the dealership, turns out the car had been in an accident that caused damage to the front end—and—the work had never been reported on the CARFAX. We decided that maybe this Civic Hybrid wasn’t such a good idea after all. If they had managed to get front end damage repaired without it appearing on CARFAX, who knows what else was lurking under the hood.

So, now we had to consider other cars and there weren’t that many used cars to choose from. I was checking out a car that had caught my eye—a Honda Insight—but was about to move on because it was a new car. My partner and I make decent money, but it’s expensive living in San Francisco, so the thought of buying a new car was almost laughable.

But we couldn’t stop looking at it—it’s a hybrid, fold down back seats with a hatchback (for the dog), a futuristic instrument panel. And then we drove it—handled very well, a comfy ride, a thin, sleek design. Plus, it has an “economy” mode, where, if you can manage to stay in the green zone (which wasn’t that hard, even at highway speeds), you can get up to 60 miles per gallon. 60 mpg! Slowly but surely, we were getting hooked on this car. And after driving a few other cars, I was convinced the Insight was right for us.

So, then Pete asked us if we had ever thought about leasing a vehicle. If you had asked me three days ago if I would ever lease a car, I would have answered with a resounding, “Hell, no!” I already rent an apartment, why would I want to rent a car? Isn’t that for wannabes who want to drive Beemers they can’t afford? Or business men who drive all of the time and can write the lease off come tax time? In any case, surely it’s a phenomenally stupid decision to lease a car, right? But it couldn’t hurt to listen, could it?

The first thing I learned about leasing a car is that it isn’t renting it. Basically, instead of buying a whole car, when you lease, you buy part of the car. At the end of the lease, you can choose to lease a newer model, buy the car you have been leasing, or hand the keys over and walk away.

Here is our situation: We were looking at buying a 2007 model for $14K. If we put down $5K, our payments would be around $250. On the other hand, if we leased a 2010 model at cost (uncle got us the family discount), we would put down $3K and our payments would be $230. A lower down payment and monthly payment? Now I was intrigued.

But I put the brakes on when I thought about the cost of insuring a new vehicle, which is required to have full coverage. That was a deal breaker to me. But then I found out I would have to get full coverage for the used car as well, since we were financing. The difference between covering the 2007 Civic Hybrid versus the 2010 Insight was nominal.

Then I was worried that if I leased, I would end up paying more over the long run, since our plan is to buy the car at the end of the lease. Not true. Here is how it breaks down.

Buy 2007 model for $14K + 600 to extend the warranty + $5K down + $250/month.

Versus …

Buy 2010 model for ~$20K (which includes the factory warranty) + $3K down + $230/month + when we have the option to buy after three years, the price will be $12K.

This is pretty much apples to apples. Buy a three-year-old car for more money or lease a new car, and in three years, it will cost less than buying a three-year-old car now. And contrary to what I thought before, we are building equity in the car—every penny we pay along the way goes toward purchasing the car, and most of the money we shell out is going toward the principal, instead of the interest, like it does in a new car.

Let's look more into leasing versus buying—the pluses and the minuses, who it does/doesn’t make sense for, what makes you qualify for a good lease, and much more.

Who Should Lease?

Leasing a car might be a good option for anyone who:

  • Likes to drive a new car every few years
  • Wants lower monthly payments
  • Wants a car that is always under warranty
  • Doesn't like trading in or selling used cars
  • Doesn't care about building ownership equity
  • Has a predictable lifestyle
  • Drive a below-average number of miles per year
  • Maintains their car well

Who Should Buy?

Buying a car might be a good option for anyone who:

  • Can pay higher monthly payments
  • Wants to build up some trade-in or resale value
  • Wants to own your car
  • Wants to ultimately get rid of monthly car payments
  • Doesn't mind paying for repairs out of warranty
  • Drives an above-average number of miles per year
  • Likes to customize cars
  • Has possible lifestyle changes in the near future

Other Things to Consider

Leasing is not renting

It’s important to point out that leasing is not the same thing as renting. When you rent an apartment, you are not building up equity in the unit. When you lease a car, however, you are building equity and you do have the option to buy when the lease is up. Just think of it has buying a little bit of the car at first, instead of the whole shebang.

Good credit score

Do you have a good credit score, like above 700? Having a good credit score always helps, but it really helps when leasing a vehicle. It helps you get a low interest rate (which means more of your money goes toward equity in the car) and if it’s high enough, you may also be able to drive away without paying a down payment at all.

Restrictions on a lease

Leases come with a term and restrictions. Most leases last two to four years and only allow for 12K miles per year. If, at the end of your lease, you have exceeded the mileage allowed, you will have to pay around .15 to .20 per mile. You are also responsible for any damage that occurred while you had the car. Some companies offer you a buffer zone—for example, Honda allows up to $1500 for normal wear and tear. If you decide to buy the car at the end of the lease, the mileage and damage don’t count. Finally, if you want to end a lease early, you will pay for it—dearly.

Gap insurance

We have seen it in the housing market—suddenly you owe more on your mortgage than your house is actually worth. It happens with car loans, too. Let’s say your car is totaled or stolen—your insurance company will pay out, but sometimes, it’s not enough. And then you are in the position where you owe your finance company even after your insurance has paid up—this is called being "upside down."

Most leases comes with automatic, built-in gap insurance, which is designed to cover the difference between what you owe on your lease/loan and what your vehicle is actually worth if stolen or destroyed. With a traditional car loan, you must pay for gap insurance—if you can find somewhere to buy it. With a lease, you get it automatically, so you will never be "upside down."

As you can see, the choice on whether to buy or lease is a personal one. Before buying or leasing any car, do your homework first and come armed with questions.

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