Lease or Buy? What to Know Before Your First Car Purchase

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The other day Corinne and I were watching Kathy Griffin’s “My Life on the D-List” – it‘s a bit of a guilty pleasure. Anyway, in the episode Kathy and her crew visited money guru Suze Orman for a little money advice.

The scene was rather unscripted as Suze went around and asked each of Kathy’s crew about their finances. When Kathy’s assistant Jessica told Sue that she leased a new car every couple of years, Suze blew up on her about how leasing was a horrible money decision.

It created an uncomfortable scene, but it was interesting to see how strongly Suze – the financial expert – felt about leasing cars.

There’s a lot of factors to consider when you’re deciding between leasing and buying so here’s a fresher if you’re in the market for a new car.

From a money standpoint, the best financial move when it comes to cars is to buy and drive the car into the ground.

At first, you’ll pay more per month, but once the car is paid off you’ll really see the savings.

When you lease, it’s as if you’re borrowing the car – you pay a little less per month, but you don’t get to keep the car so you get no equity from your payments.

Lease Positives

- You can get a new car every couple of years if it interests you

- Because you’re only paying for the limited use of the car, your monthly payments will be lower, which is why, according to leaseguide.com: “75% of luxury cars are leased”

- Your car is under warranty so any big problems are covered

When you lease a car it’s easier to afford now, but down the road you don’t have anything to show for your payments.

With buying you pay more per month, but you own the car and save more in the future.

Let’s look at an example between leasing and buying with a $25,000 car.

Lease

When you lease for, say 3 years, you pay the difference between what the car’s worth now, and it’s estimated value in 3 years.

If the car is quoted at a value of $18,000 in 3 years, you’ll pay the $7,000 difference over the 3 years you lease. along with finance charges and some other costs associated with leasing.

During your lease you’ll pay a monthly payment that is made up of a depreciation charge, a finance charge, and sales tax. Simply put, you’re paying the leasing company for using their car (and money) and paying for the the loss of the car’s value over the 3 years you use it.

There are other fees associated with leasing that buyers don’t have to deal with such as a security deposit, bank fee, disposition fee, and tax on the down payment.

Here’s what an average monthly payment for a leased car could look like:

Lease Price: $25,000

Average down payment: $1,000

Depreciation fee: $90

Finance fee: $110

Sales Tax: $15

Monthly Payment: $215

Buying

When you buy a $25,000 car you pay a down payment, and then monthly payments based on the length and interest rate of your loan.

According to BankRate.com, a typical loan for a new car in 2009 was 60 months at 6.82%.

Here is what an average monthly payment could look like for a purchased car:

Car Price: $25,000

Interest Rate: 6.85%

Loan Term: 72 months (6 years)

Monthly Payment: $410

Actual cost of car: $30,336

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Over the first couple of years, it’s a better value to lease. But once you pay off your loan, it’s a better financial move to buy because you no longer pay anyone to own your car.

It will always be cheaper to own 1 car for 12 years than lease 4 cars over 3 years. However, there’s more factors than money when you’re deciding to lease or buy.

If you like driving a new car every couple of years, want your car under warranty, and don’t drive a ton of miles than a lease may be for you.

But if you’re super money conscious and only looking for the best value, buy a car and drive it until it can’t go another foot.

This is just a simplified version of leasing vs. buying, but it should provide a springboard to learn more about the topic in the near future.

Do you prefer buying or leasing? Have any horror stories to persuade readers either way? Let me know in the comments!

Photo by YtseJam

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