Congratulations -- you've decided to get a new car. But now comes the hard part: buy or lease?
Which option you choose depends on financial priorities. Some factors to consider include how much you can afford in monthly payments, amount of cash on hand for a down payment and expected number of driving miles a year.
With leasing, you pay the difference between the car's sticker price and value when the lease ends, called residual value. Lease payments cover this change in value along with financing charges, fees and taxes. As a result, leasing is a good option for business travelers or people who like exchanging cars every few years and drive fewer than 15,000 miles a year. (Mileage is important because the higher a car's mileage, the lower its residual value.)
In the long run, buying often costs less than leasing because you own the car outright after the loan period ends. That means you can keep driving it long after you've made your last monthly payment.
But what makes more sense when monthly payments are a limiting factor, or short-term costs need to be taken into consideration? To crunch the numbers, turn to the online Buy versus Lease calculator from BankingMyWay.com. Enter the purchase price, down payment, sales tax and an estimated investment return (used to calculate the returns you might otherwise have earned on the cash you pay upfront). Next, enter the details of the loan (term, interest rate, fees and annual depreciation) and lease (term, interest rate, fees, estimate of residual value and security deposit).
Say you're eying a $20,000 car, you have $1,000 for a down payment and your state charges a 5% sales tax. The average interest rate on a 48-month loan is 7.27%, according to BankingMyWay.com, and your dealer is offering a package with no additional fees. You're looking to compare that deal to a 36-month lease with a 7.17% interest rate (in general, lease rates run a little lower than loan rates), a $100 financing fee and a $500 security deposit. Typically, cars depreciate 10% to 20% a year -- you can get an estimate at the Kelley Blue Book Web site. If a car loses about 15% of its value a year, the residual value is 55% at the end of a three-year lease. The monthly loan payments would be $481 over four years, compared to monthly lease payments of $329 over three years.
By taking the lease deal, you pay $152 less a month. The lower monthly cost explains why so many consumers opt to lease cars. But take a closer look at taking out a loan, then selling the car after three years. If you pay off the remaining balance on your four-year loan, you'll end up paying $932 less over those three years than you would if you had leased the car (assuming, of course, that you sell your car at its estimated market value). That's because you build up equity in your car as you pay off your loan, which is not the case with a lease.
Leasing offers short-term savings, and buying gives the better financial deal in the long run. The right choice for you, however, depends on the rates and incentives offered by a dealer. Search Edmunds.com for a list of incentives and rebates from dealers near you, and check the auto section of BankingMyWay.com for the latest rates in your area.