Should you BUY or
LEASE your car?
It used to be said “if you keep your car until the
‘wheels fall off’, you should buy your car” – not lease it.
This widely accepted principle is based on keeping a car for as long as you can,
after the loan is fully paid off.
Most advisers will say it makes good
economic sense to pay out $1000 or $2000 a year in repair costs after the loan
is paid off rather than make $3000 to $4000 a year in car payments.
But
economic conditions have changed over the last few years. Rising new car prices
together with higher interest rates make financing a car more and more expensive.
Now, consumers are forced to consider longer-term loans just so they can afford
the car payment on an average priced car.
For this reason, banks and credit
unions are now offering car loans for up to 8 years to meet consumer needs. Statistics
have proven, however, that 81% of those who took 5-year loans got rid of the car
before the loan was paid off. So the reality is - they never end up owning their
car.
Now, with the advent of longer-term loans, the economic feasibility
of “keeping the car until the wheels fall off” may be difficult to do.
The reason – the longer you keep a car the more it cost in repairs.
Payment
conscious consumers who are on budgeted incomes just can’t afford to make
both a car payment and spend money on major repairs. This combination is the impetus
for them to get rid of the car early. And, of course, this creates other problems.
Among the problems of getting rid of a car before the loan is paid off are “negative
equity” situations.
Then why is leasing becoming so popular again?
The reasons - lower payments and shorter terms. Generally a 36-month lease is
about the same payment, or even lower, as a 60 month loan.
Here are some
of the differences between a loan and a lease.
When you buy, the bank holds
the title. You don't own your car until the loan is paid off.
When you
lease, you never have ownership unless you buy the car at the end of the lease.
When
you buy, you build up equity because of your higher monthly payments. You are
paying the entire loan off 100% - down to a zero balance.
When you lease,
you are paying to “use” the vehicle not to own it. You only pay for
the portion of the car’s value that you use. For example, if a car costs
$20,000 and you only use 60% of its value, then your payment is only based on
$12,000 – not on the full $20,000. The 40% of the cars remaining value, or
the $8,000 that you do not use, is not part of your payment
About
the Author:
Mike has a thirty year career in automotive management and
vehicle leasing. A former automobile dealer, Mike was also the National Supervisor
for Navy Federal Credit Union’s Vehicle Leasing & Auto Buying Service.
Mike is currently the Manager for Consumer Leasing for Allstate Leasing
To
contact Mike call 800-223-4885 or email at
mblumenthal@allstateleasing.com
