Lease Verse Purchase – Car Buying Guide

Learn the advantages of auto leasing over most purchase installment agreements. Every one has different vehicle needs. There are also important tax considerations to consider. Consideration of your options can save you money in short and long term.

Reasons for auto leasing

Whether you choose to buy or lease your new car should depend on a number of factors. If you are the kind of person who likes to get a new car every few years and don’t drive more than 15,000 miles per year, leasing might be the best way to go. You will want to make sure that the term of the lease is not longer than 3 years, unless you really plan on driving the vehicle for longer. It is also important that you make sure that the mileage specified on the lease will cover the number of miles you intend to drive annually. Getting out of a lease early can be very costly. When leasing, one of the advantages is that it normally requires less money down and will give you a lower payment than if you were to purchase the same vehicle. The reason is that you never buy it down to a zero balance. The “residual” or guaranteed cash value at the end of the lease is what you are buying down. In addition there might be tax advantages for auto leasing is being used for business. It is best to check with your accountant to see if it would be to your advantage to lease.

What is a lease residual?

Residual is the dollar amount that the bank guarantees your new car will be worth at the end of the lease as long as you stay within the terms of the lease. At the end of the lease this is also the amount you would pay for the car if you wanted to purchase it, plus tax, license, doc & any other applicable fees. The residual is set by the bank and is a percentage of MSRP regardless of what the actual purchase price is. Residual is not negotiable as the bank is guaranteeing the value and therefore they set it. If at the end of the lease, you have stayed within the terms of the lease, if the car is worth more than the residual, you might want to buy it, sell it or trade it in. If however at lease end the value is less than the residual, you can give it back to the bank and not be responsible for anything (As long as you have stayed within the terms of the lease).

Reasons to purchase

If you are going to purchase an automobile, go with the shortest-term loan you can. It’s always smart to be pre-qualified for the loan before going to the dealer. Your own bank or credit union is a good place to start. There are many on line resources for auto loans as well. Go to the helpful resources of this car buying guide for further online assistance.

Do not feel like you have to use your pre approved loan, if the dealer has a program that is equal to or better than the one you have in place, it just makes sense to use the dealer financing. It is best to purchase your new car if you keep vehicles for a long time and or drive many miles per year. The exception to this rule is if you are purchasing for a business. Often it makes more sense financially to lease, but check with your account to help you decide if you should lease or purchase.

Should I qualify for a loan before buying a car?

Most dealerships have a number of lenders they work with factory financing. Usually if there is a special interest rate, it would be in lieu of any rebate available. If you have a loan in place before you go to the dealership you will accomplish a few things: You will know that you qualify for an auto loan and how much you qualify for. It is best to compare rates with the dealer to make sure that you are getting the best possible interest rate. This way you can also explore whether you should take advantage of the special factory financing or the factory rebate if applicable. Be careful in how you approach this with the dealer. Do not talk payment with the dealer, instead talk price and interest rate. Do not hesitate to use dealer financing if it is competitive. This is one place a dealer can make money, so they might be more inclined to work with you on price.

Should I read all the paperwork?

In most states the contracts and paperwork you sign when purchasing a new car are heavily regulated and cannot be altered by the dealer. This does not mean that you should not read everything before you sign it. Make sure that everything promised to you is in writing and signed by both you and the dealer. It is the finance manager’s job to explain all documents before you sign them. However it is your responsibility as a consumer to make sure that you have read and understand what you sign. The paperwork can be very cumbersome and overwhelming however this is no excuse not to at least understand it. The most important papers are the contract (Lease or loan) and the “Due bill” or “We owe/you owe” paper. The Due bill should have all promises, additions or subtractions on it and be signed by both parties. The contract is the intimidating one. Bring a check list with you to check for the following on the contract: Term, Rate, Price (Cap cost in a lease), Payment, Aftermarket products, extended service contract (warranty), Allowable mileage (Lease) any additional insurances (Credit life & disability, involuntary unemployment etc.) If there are any charges that you did not agree to or you do not understand, do not sign anything. Just because you are sitting in the finance office, does not mean that the deal is done. For other resources from our car buying guide, visit our helpful resources section.

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