Leasing v. buying your next car

According toEdmunds.com, more than 25 percent of new American cars are now financed bylease instead of loan, and most of the people making that choice are under age35.

It’s all about thelowest possible monthly payment.

Yet for drivers youngand old, leasing has grown substantially because it can also be done withlittle or no money down and the chance to get a newer, better car for lessmoney overall.

The main disadvantage?You won’t own the car unless you buy it at the end of the lease, which may ormay not be a good deal.

Experian Automotive – adivision of the major credit reporting service – reported in mid-2015 a nearly$100-a-month savings for those who lease cars versus those who buy their carsby loan. Their numbers showed the average monthly payment for a brand-new leasedvehicle was $394 a month against $483 for a new vehicle purchased by loan.

So would leasing be agood deal for you? Don’t decide without research, qualified advice and athorough look at your finances. Start with the major pros and cons:

Leasing:

Pros: Lower downpayments and monthly payments than required with a conventional auto loan; lowrepair costs thanks to factory warranties typically tied to the term of thelease (usually three years); easy drop-off or trade-in once the lease expires;and lower sales tax expense because the lease is based on only three or fouryears of use.

Cons: You’reessentially renting a car, not buying it – payments are cheaper because you’rereally only paying interest and depreciation expense and not receiving any equityin the vehicle; annual mileage caps (usually 12,000-15,000 miles) come withstiff penalties if you exceed those limits; and potentially steep fees forexcessive wear-and-tear on the car or early termination of the lease.

Buying:

Pros: Freedom to put asmuch or as little mileage, wear-and-tear and modification on the vehicle as youchoose; long-term (100,000 miles or over) car ownership with good maintenancecan be much more economical long term; and because you own the car, you cansell at any time.

Cons: You’ll generallyrequire a higher down payment than a lease; monthly loan payments are generallyhigher because unlike leasing, you’ll be taking ownership of the car once it’spaid off;; once factory warranties expire, you’ll take on full maintenancecosts for an aging car that may or may not be expensive; and you’ll have morecash tied up in a depreciating asset for as long as you own the car.

All these positives andnegatives aside, it’s important to know that with loans and leases most detailsare negotiable, so it’s important to do your research. Start by estimating howmuch car you can actually afford(http://www.practicalmoneyskills.com/HowMuchCarCanYouAfford) and seek outqualified financial and tax advice to shape how you’ll approach the bestpossible deal for your financial situation.

For many, leasingrequires more extensive study because this form of financing is relatively newto most drivers and the terminology (http://www.cars.com/advice/) can bedaunting. But generally, the best deals depend on two major factors –negotiating the lowest price on the vehicle going in and making sure it’s avehicle that has a high estimated post-lease value. In short, the lessor’sability to keep making money on a high-value leased vehicle allows a lower monthlypayment at the start.

Bottom line: If youneed a vehicle, it pays to evaluate whether lease or purchase makes the mostsense for you. Know your needs and get advice so you can make the mostaffordable choice for you.

Nathaniel Sillindirects Visa’s financial education programs. To follow Practical Money Skillson Twitter: www.twitter.com/PracticalMoney.