When leasing a car beats buying -- and vice versa

While most people purchase cars rather than leasing them, leasing may be a better option for you. Here's what you need to consider.

By MSN Money Partner Aug 19, 2013 11:48AM

This post comes from Angela Colley at partner site Money Talks News. 

MTN logoIf you're ready for a new car, you're likely asking yourself what type of car you want, whether to upgrade to a larger ride and which color you prefer. But here's another question you should be asking yourself: Should you lease or buy?

Most people finance their vehicles or pay in cash, but leasing has some benefits too. How do you decide? Here are some of the factors you should consider before you make up your mind.

What does leasing really cost?

Leasing typically has lower monthly payments than buying, which is its greatest appeal. But your monthly payment isn't the only amount to consider. To get the best deal -- and keep the most money in your pocket -- calculate the actual cost overall for both buying and leasing.

Here's an example: Say you find a car with a $30,000 purchase price. You finance the purchase at 3% for 36 months with a $1,000 cash down payment. Assuming you don't have a trade-in, your monthly payment would be $872 and you'd pay $31,392 overall.

Let's see what happens when you lease the same car for 36 months with $1,000 down. Assuming a monthly payment of $500, you'd pay $19,000 overall.

In 36 months, you decide you don't want the car anymore. If you financed, you could sell the car for its current value -- say, $18,000. So owning the car for three years has now cost you only $13,392. If you leased it, you can't sell it, so your total is still at $19,000 -- thus making it much less expensive to purchase the car.

Man changing oil © Ron Chapple, Getty Images

Granted, this is a simple example that doesn't take into account the upfront fee to lease the car, sales tax and other factors. To do the math for your specific situation, try several online calculators, such as Edmunds.com's auto loan and auto lease calculator. Bankrate has a questionnaire you can fill out.

Repair bills

Whether you buy or lease your new car, it's likely covered for the first three years by a warranty. Older cars, as we know, become more expensive to repair over time as major parts wear out. The person leasing a car (or the person who buys a new car every three years) won't have to worry about those types of expenses.

However, you will be required to keep the leased car in pristine condition. Any dings or dents beyond normal wear and tear will cost you extra when you turn the car in. Consider having them repaired before that deadline.

Higher costs and extra fees

Leasing comes with some higher out-of-pocket costs and some potential fees:

  • Gap insurance. It's wise and often required to have extra insurance -- called gap insurance -- on a leased car so that the replacement cost is covered in the event you total it. Likewise, gap insurance is also recommended when you buy a new car and the amount you owe is greater than what the car is worth as its value depreciates.
  • Mileage limit. Leases come with a limit on the number of miles you can drive the car -- often 15,000 miles a year. Exceed that limit and you'll pay a large per-mile penalty when you turn the car in.
  • Early-termination penalty. Getting out of a lease early will cost you a penalty -- generally the remainder of what you owe on the lease. However, you might be able to transfer the lease to someone else. Sites like LeaseTrader.com and Swapalease charge a fee to find buyers for your lease.
What if leasing is for you?

Despite the drawbacks, leasing may be your better option if you want to drive a new car every two or three years, you need a car for a limited amount of time, or you need a new car for your business but simply can't afford to pay the higher monthly cost of financing one. What should you be aware of when you negotiate a leasing deal?

  • Capitalized cost of the car. That's the price of the car plus the acquisition fee, and it is negotiable. Just as you wouldn't pay the full sticker price when buying a car, you should haggle for a lower capitalized cost of a leased car.
  • The "money factor." That's the interest or lease rate calculated into your monthly payment. It too is negotiable, so shop for the lowest rate.
  • The residual value. That's what the leasing company says the car will be worth because of depreciation when the lease ends. The residual value subtracted from the capitalized cost will determine the cost of your lease. A lower depreciation rate will mean a lower monthly rate for the car.
  • Fees and more fees. There can be many, so you need to read the contract carefully before you sign. For instance, will you have to pay a fee if you don't lease another car when your lease expires?

Which do you prefer -- buying or leasing a car?

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