If you’re thinking of replacing your car, you may be wondering if you should lease or buy your next vehicle. Leasing used to be commonplace only for businesses because of the tax write-off. Now, with deals like zero money down, low monthly payments, or zero percent interest, leasing has become a popular option among the general public. There are many factors to consider when weighing leasing versus buying a car, say the experts at the Pennsylvania Institute of Certified Public Accountants (PICPA). Leasing may be a wise decision for one person, but may not make financial sense for someone else. Think about the pros and cons of each option before you sign on the dotted line.
Advantages of Leasing
- Low down payments. A lot of the advertised lease deals assume a down payment, but you can often get a better deal just by asking. But don’t forget, the more cash you put down, the lower your monthly payments will be.
- Low repair costs. With a three-year lease, the factory warranty typically covers most repairs.
- Low monthly payments. Since you are only paying off the depreciation on the car –not its full value –monthly payments tend to be lower than if you opt to finance the purchase of the entire car over the same period of time.
- You pay sales tax only on the portion of the car you finance.
- Easy out. If you've taken good care of the car and it’s in good shape at the end of your lease, you will simply hand over the keys to the dealer and drive away with a brand new car and a new lease arrangement. You don’t have to deal with selling a used car or negotiating a trade-in value.
Disadvantages of Leasing
- You will have nothing to show for your expense. Leasing a car is like renting an apartment. Your monthly payment does not go toward eventual ownership.
- Lack of flexibility. If you want out of your lease before the end of the agreement, you may encounter a financial penalty. Read the agreement carefully before signing.
- Hidden costs. If you exceed the allowable mileage over the course of the lease, you may be hit with a mileage charge. Also, be aware of any damage costs you will be liable for beyond normal wear and tear.
- Insurance issues. Depending on the type of insurance you carry, it may only reimburse you for the car’s current market value in the event the car is stolen or totaled in an accident. Some lease agreements will include extra coverage to protect against this. Discuss options with the dealer.
Advantages of Buying
- It’s yours. You will own the car and do what you want with it, when you want.
- Buying a car makes long-term financial sense. It is more economical in the long run, unless you buy and trade-in regularly.
- Drive around the world. There’s no penalty for driving excess mileage.
Disadvantages of Buying
- A higher initial down payment is generally required.
- You're responsible for maintenance costs once the warranty expires.
- Trade-in or selling hassles when you're ready to part ways with your car.
- More of your cash is tied up in a car, which depreciates in value.
Crunching the Numbers
One of the reasons leasing a car is appealing to some is the fact that they don't have to pay for or finance the entire cost of a vehicle. You're simply paying for the use of that vehicle over the length of the lease. To help put a dollar figure on the comparison, consider the following:
- Total initial payment, which includes the down payment and any extra fees.
- Amount of each monthly payment.
- Number of months in the lease term.
- Possible additional charges at the end of the lease (mileage, damages).
With a lease, the monthly payment is based on the difference between the vehicle's transaction price and its estimated worth at the end of the lease term. This difference is financed at a particular rate of interest.
Typically, the down payment and monthly charges will be lower with a leased vehicle than a purchased vehicle, which is why you can usually obtain a better vehicle for the same cash you put down. Most leases will also have the option of purchasing the vehicle at the end of the contract. This, however, is often more expensive over time than buying it outright.
Evaluating Your Situation
- How is your cash flow? If you’re short on cash, leasing may make more sense because you’ll typically be required to put less money down.
- Are you a new car junkie? Leasing can provide you with a new car every few years.
- How many miles do you drive each year? A typical lease customer drives 15,000 miles each year. If you drive substantially over or under this average, leasing may not be for you.
- Do you use your car for business purposes? If you are deducting a portion of your car's depreciation from your taxes, you will be able to deduct substantially more if you lease. Interest paid on loans to purchase a car is not deductible. When you lease, you can deduct depreciation as well as the financing costs. The IRS limits depreciation deductions for certain luxury cars.
- Are you hard on your car? If so, leasing may not be right for you. The wear and tear may trigger damage fees at the end of the lease.
A CPA Can Help
Whether you lease or buy, a car is a big investment. A CPA can help you analyze your current situation and determine the best course of action with regard to your personal financial plan. To find a CPA in Pennsylvania by location or area of expertise, ask your friends or family for a recommendation or use PICPA's CPA Locator.
Original publication date: Oct. 21, 2013