LEASING vs. BUYING - which one is best?

Leases and purchase loans are simply two different methods of automobile financing. One finances the use of a vehicle; the other finances the purchase of a vehicle. Each has its own benefits and drawbacks.

It's important to understand that buying and leasing are fundamentally different, not just two versions of the same thing.

When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the vehicle for its depreciated resale value.

When you lease, you pay for only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments, and you pay a financial rate, called money factor, that is similar to the interest on a loan. You make your first payment at the time you sign your contract - for the month ahead. At lease-end, you may either return the vehicle, trade it in for a new Toyota (with guaranteed trade-in value), or purchase it for its depreciated resale value.

This is fundamentally why leasing offers significantly lower monthly payments than buying - because you're paying only for the depreciation that occurs during the time period that you're driving the vehicle.

How are lease and loan payments different?

Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle's value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you're driving it. In effect, you are borrowing the money that the lease company used to buy the car from the dealer. You repay part of that money in monthly payments, and repay the remainder when you either buy, trade, or return the vehicle at lease-end.

Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the full vehicle purchase price, while the finance charge is loan interest.

However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing - it's money you never get back, even if you sell the vehicle in the future. It's lost money for which you'll have nothing to show.

The remainder of each loan principal payment goes toward equity. It's what remains of your car's original value at the end of the loan after depreciation has taken its toll. Equity is resale value. It's what you get back if you sell the vehicle.

The longer you own and drive a vehicle, the less equity you have. At some point in time, after the wheels have fallen off and the engine is worn out, the only equity left is scrap value. You never get back the amount you've paid for your vehicle.

Savings account or no savings account

So, buying a car with a loan is essentially like putting money into a declining-value savings account - you never get out as much as you put in. A portion of every payment you make is lost to depreciation and finance charges. What you have "to show" for your investment when your loan is paid off is only the part that is left over after depreciation and interest. A terrible investment by any measure.

With leasing, however, you only pay for what you use and you don't put anything extra into "savings." It's true that you'll own nothing at the end of a lease; you'll have nothing "to show" for the money you've put into it. But... what you don't own is the same part of the car's original value - the depreciated part - that a buyer ALSO DOESN'T OWN at the end of his loan. Again, a car's value depreciates the same amount whether it is leased or purchased. That money is gone forever, lease or buy.

With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing - such as paying the mortgage or buying groceries.

Additional peace-of-mind:

Most car leases have automatic built-in gap coverage, while car purchase loans almost always do not. Gap coverage, or gap insurance, pays the difference between what you owe on your loan or lease, and what your vehicle is actually worth if your vehicle is stolen or destroyed.

Why is gap insurance important? Because it's very common, in these days of long term loans and leases, rolled-over and refinanced loans, and little or no down payment, to be "upside down" - to owe more on your loan or lease than your car is actually worth. This can mean you'll still owe hundreds or thousands of dollars to the finance company even after your insurance has paid off for a car that has been totaled or stolen. This turns out to be a shocking surprise for most people caught in this unfortunate situation.

So, nearly all leases have gap protection, but most loans do not. You're better protected with a lease, unless you purchase the gap insurance separately at extra cost for the loan.

Leasing gives you options:

At any point during your lease, you have the ability to sell your vehicle, or to purchase it outright yourself by paying off the balance remaining on the lease. You can get a conventional loan for this remaining balance, and you'll have turned your lease purchase into a loan purchase.

At the end of your lease term, you have multiple options as well - you can get a loan for the remaining balance on the car and continue driving it while making payments that, while not as low as your lease payments were, are lower than what your payments would've been had you gotten a loan when you originally purchased the car.

You also have the option to trade the vehicle in on a new vehicle - under a Toyota lease, you are given what amounts to a guaranteed end-of-term trade-in value (called the "residual"). Basically, the leasing company is predicting the future - they are telling you ahead of time what your vehicle will be worth at the end of your lease term, and will guarantee that amount IF you purchase another new Toyota, AND if the condition of your leased vehicle is reasonably good.

One of the reasons Toyota leases specifically are such a great deal is that Toyota's resale value is consistently high - our vehicles depreciate LESS over the
term of a lease than our competitors, meaning Toyota's residual amounts are usually much higher. Less depreciation means lower lease payments, and a higher residual value at the end of the term - both VERY good things!

A third option at the end of your lease term is to turn the vehicle in and simply walk away, although relatively few lease customers choose this option.

Should you lease?

Do you like driving a new vehicle every two to three years? Do you like having 30% to 60% lower monthly payments? Do you like to always drive a vehicle with the latest safety features - one that is always under factory warranty? Do you hate buying and selling used cars? Do you take reasonably good care of your vehicle?

If so, it sounds like leasing might be for you!

Ask your friendly Momentum Toyota of Tulsa Toyota Sales Representative or Finance Manager if you have any questions about leasing YOUR next vehicle here at Momentum Toyota of Tulsa!

 



This article uses information from leaseguide.com