The expense of obtaining and operating a car or truck is a permanent way of life for most of us, but we don't all choose the same method to deal with the costs. Some of us buy vehicles, some of us lease them, and there's no standard answer to which choice is "best."
This set of FAQ can help you determine if a lease or purchase is your own best choice.
What is a truck or car lease?
Think of a car lease as a long term rental. You do not own the vehicle and at the completion of the typical closed-end lease you return it and pay any end-of-lease costs that are due to complete your obligations.
How does that differ from buying a car?
When you buy a car or truck, and pay for it with a loan, the vehicle is still yours at the end of the loan period. If you want a new vehicle it's up to you to trade or sell the old vehicle.
Why are car lease payments lower than loan payments?
With rare exceptions, every new car or truck depreciates--goes down in value--as soon as you drive it off the lot, and continues to depreciate with age and as you add miles to it.
Lease payments cover only the portion of the vehicle's value that you use during the time you drive it--the depreciation--not its entire cost. Finance charges are tacked on to your payment and most states charge sales tax on your payment amount.
When you buy a car with a loan you are responsible for paying its full cost, plus finance charges and the entire sales tax required by your state. Depending on your downpayment or trade-in value of another car, that can result in higher payments than for a lease, even if you obtain a long term loan.
What payments might be due at the beginning of a lease?
- Your first monthly payment
- A security deposit or your final monthly payment
- An additional downpayment
- Fees to cover licensing and registration of the vehicle
- Freight and destination charges
- Processing fee
What payments might be due at the end of a lease?
Excess Mileage Fees
A car lease stipulates the maximum number of miles you can drive it during the lease period. At the end of the lease you'll pay a per-mile charge for every mile you've driven over the limit.
You can usually purchase extra miles at the beginning of the lease at a cheaper rate than you'll pay if you exceed mileage at the end.
Damage to the Vehicle
The leasing company expects some degree of wear to occur through normal use of the vehicle, but you must pay for damages or excessive wear that are discovered when you turn the vehicle in.
If your leased vehicle is a truck, consider installing a bed liner if you plan to use the truck to haul items that could scratch or damage the bed. Make sure the liner itself is a type that does no damage.
You will be asked to pay hefty fees if you terminate a car or truck lease early.
Is it true that if I lease I'm not responsible for maintenance expenses?
You are responsible for the costs of maintaining the vehicle during the contract period just as if you owned it. That includes paying for expenses such as insurance, oil changes, maintenance to brakes and tires, and other costs for regular upkeep. You are also responsible for all taxes that are assessed by your local government.
Warranty repairs are covered no matter who owns the vehicle. Lease terms typically end before a vehicle goes out of warranty.
How can I compare car leases?
- Up-front payments required to obtain the vehicle
- The vehicle cost used to calculate the lease--and remember that cost is negotiable
- Lease end fees, including charges for excess miles
- Mileage allowance
- Purchase options during or at lease end
What is gap insurance?
If your car is stolen or destroyed, your regular auto insurance will make a payment for its market value. Since depreciation begins the minute you begin driving the vehicle, its market value could be less than what you owe on it as soon as you take it home. That's where gap insurance kicks in, paying the difference between what's owed and what the vehicle is worth.
Many lease agreements include gap insurance. If yours doesn't--it should. Gap insurance is also recommended for new car purchases. If it isn't offered to you, ask for details about it.
If I lease I won't build equity?
That's true, you are paying for usage instead of ownership, but how much are you actually paying to own a vehicle? Add up all the payments you'll make on the car and compare that to what the car will be worth when payments stop.
Car ownership always results in dwindling equity--unless you buy a vehicle that's destined to be in-demand as a classic, and keep it long enough for that happen.
A car lease might be best if:
- You prefer to drive a new car or truck every two or three years
- You want to drive a vehicle that you can afford to lease, but cannot afford to buy
- You don't put more than 12,000 to 15,000 miles on your vehicle each year
- You don't use the vehicle in a way that causes excess wear and tear
- You can't or don't want to make a large downpayment
- You use the vehicle for business purposes and can write-off your lease expenses (ask a tax professional for advice)
Buying might be best if:
- You plan to pay off the vehicle, keep it and avoid loan payments for awhile
- You don't mind paying for repairs after the warranty period has passed
- You put significantly more than 15,000 miles a year on a vehicle
- You have credit issues--it's sometimes easier for people with credit problems to buy than to lease
- You might want to trade it in for another vehicle in less than two years
- You want to customize the vehicle