Anyone interested in driving a car is stuck in this eternal question: Does it make sense to lease a car instead of buying it outright?
There are many dimensions to how this question could be addressed. Several pieces are involved in car lease that makes it comparatively complex than buying a car where you just have to buy a car by paying the cash. But buying can also be complex if it involves financing a car through a loan. If you are looking for a quick and easy answer then, from a financial point of view, the right way would be to buy a car.
Another dimension to buying a car from a financial perspective would be to opt for a vehicle that is slightly used before. A car that is one or two years old is still in its sweet years. The reason is that the cars depreciate quickly in their initial few years. But after a couple of years, the depreciation tends to slow down.
You can surely save a bundle if you buy a relatively new used car as compared to purchasing a new model of the same make. And since the car has lived its initial high depreciation years, you can sell it close to your buying value even after using a few years.
Another way to save on buying would be to take over a leased car which has been driven for a couple of years and has a year or a few months left on its lease contract. You can find one online through Quitalease where you do not have to pay anything like dealer fees or any hidden charges. If you are satisfied with the leased car after driving for a few months, you can buy the car after completing its lease period. Even if you don’t want to buy it, you do not have pressing financial liabilities to cover at the end of the lease.
So how do you compare the positives of your lifestyle with the financial side of the leasing?
There are three financial numbers you should consider carefully cautiously before you make a decision about leasing a car:
The equity you surrender by choosing the lower lease payments
Apart from the fact that you get to drive a new car every few years, what makes leasing so appealing is that your monthly payments do not put a dent in your wallet every month.
The reason behind these lower payments is that, in leasing, you are only paying for the amount that the car will depreciate over the course of the lease term.
Have a look at this example. If you are leasing a car worth $35,000 for a three-year period. Suppose the car’s residual value at the end of the lease period stands at $19,000. The interest rate on the car was 1.9 percent without paying anything down. Then your monthly lease payment would be approximately $470. But if you were to buy that same car and pay its installments in three years with zero percent financing, then according to the vehicle calculator, your monthly installment could be a whopping $1000.
You would know by now that at the end of the lease, you own nothing. Had you bought the same car then you’d have an asset that you can sell for $19,000. Even if you do not want to sell the car, you can keep driving it for another few years at least. And all that you had to pay was with little more than the regular maintenance costs.
Think of yearly mileage
This is another important financial factor that needs your attention before you make a decision to lease a car. You must figure out your daily, monthly or yearly commute. Carefully calculate how many kilometers you are likely to drive in a year.
The lease rate or the figure that you see in advertisements is based on low mileage. Exceeding your allowed mileage will cost you extra bucks that you have to pay at the end of the lease.
The common mileage limit in the U.S. ranges between 12,000km to 15,000km per year. But it is a low mileage, an average U.S citizen can easily drive more than 25,000km a year. You can easily cross your mileage limit even if you have a short commute. You could be charged another few hundred dollars for little repairs at the end of the lease. Car companies are usually particular about these things.
Pay heed to your tax deductions
Since leasing is considered better than buying a car, so if you are self-employed or you run a business then you can claim your vehicle expenses on your yearly tax returns.
Leasing provides a better tax deduction than buying a car. The margin would increase if you have leased an expensive vehicle. If the vehicle is around $40,000 or more, then tax returns could be higher.
When you lease an expensive vehicle, then the difference better the maximum amounts you can depreciate on the purchase is lower than the amount that you can deduct in case of a lease.
But this would not make a huge difference for those who have an average budget for having a car.