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When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it or how long you keep it. Monthly payments are higher than for leasing. You typically make a down payment, pay full sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company based on your credit score. 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 or trade value, which may be considerably less than the vehicle's original cost
When you lease, you pay only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. Leasing is a form of financing and is not the same as renting. You have a choice of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit that you don't pay when you buy. 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, or purchase it for its depreciated resale value. You may be charged a lease-end disposition fee, and for any excessive mileage or wear-and-tear.
When you lease you buy only "trouble-free" years of the car and do not pay (possibly expensive) maintenance charges. Generally for 12 year car lifespan you can expect to save around 50% by owning a car vs. leasing it for three years. Of course you will be old vehicle after first six years and can suffer from rip-offs during reparirs but still 50% is a reasonable estimate.
As an example, if you LEASE a $25,000 car that will have, say, an estimated resale value of $13,000 after 24 months, you only pay for the $12000 difference (the depreciation), plus finance charges (which BTW can be substantial). You return the car at lease-end and need to pay again registgration feed, tax, etc. You insurenace cost might be slightlyh higher as you do not own the car.
When you buy a car (cash or loan), you pay the entire cost of the car ($25,000), plus the interest on your loan plus other charges (registration cost is equal to what is charged for registration on a three year lease). You own the car at the end of your loan or immediately if you paid cash. After you paid your loan, you have the option to sell or trade the vehicle, or continue to drive without monthly payments for the total useful life of the car (let's assume 10-12 years or 150K miles for modern cars)
All cars suffer the same depreciation regardless of whether they are purchased or leased.
Because leasing is made somewhat more complicated with residuals, term, money factors, acquisition fees, etc.; it shouldn't be undertaken quite as casually as you might with a car loan. There are more opportunities to misunderstand and make mistakes. Therefore, leasing requires that you be more careful and more informed.
Leasing may also require a higher credit score than a car loan. Personal credit scores are
available for free online with a simple enrollment at web sites such as
CreditReport.com.
Your score might mean the difference between leasing and buying, or not getting approved for either.
It's easy enough to evaluate a car purchase based simply on price. You can use a free service
such as
TrueCar
to compare the price you are being offered to what other people are paying for the same car.
However, evaluating a lease is more difficult because payments are based on a combination of factors, of which price is only one. There's also residual value, term, and money factor. To help you, we've developed an easy-to-use free online Lease Deal Calculator that does the job for you.
Some people lease with the intention of buying their vehicle at the end of the lease, or before the end of the lease. It allows them to start out with lower payments by leasing and then buy the car at lease-end with a used-car loan. This technique is nearly always more expensive in the long run than simply buying outright.
Most car leases have automatic built-in GAP coverage, while car purchase loans 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 in an accident.
As with any question of this type, there can be more than one answer, depending on particulars.
A slightly better way to drive a late model car at the lowest possible cost is to take over someone's existing car lease. It's less expensive than taking out a new lease. You avoid all the up-front hassles, negotiations, and fees. Many people who took great lease deals now need to get out after losing a job or suffering other financial distress. Most lease companies allow those leases to be transferred to someone else by simply paying a small transfer fee. Online companies such as swapalease.com act as match-makers. You can look over their vehicle listings and if you find a car you like, they help arrange the lease transfer. The "seller" pays most of the cost. It's easy and fast.
Car leasing is always more expensive in a long run, if the car is reliable and can last a decade. You overpay approximately 50% for the privilege to drive the latest model and never have a trouble of repairing your car. The ability to avoid all the stress connected with repairs is probably the most significant plus (for 12 years typical maintenance cost are around 6-8K )
If you can take over someone's existing car lease, you save on down payment and the cost comes close to the cost of ownership. It's less expensive than taking out a new lease. You avoid all the up-front hassles, negotiations, and fees.
Let's simplify the answers and summarize them here:
1. You can consider four three year leases of the car equivalent to buying. The SHORT-TERM monthly cost of leasing is ALWAYS SIGNIFICANTLY LESS than the cost of buying. But total costs of leasing are dramatically higher.
With zero down payment for the same car, same price, same term, and same down payment, monthly lease payments will always be 60% or more lower than cash or loan payments. The total price you pay for 12 years will be approximately twice the cost of the car. This is still true even when if we assume zero interest in both cases.
2. The life of the car (9-12 year) cost of leasing is approximately 50% higher then the cost of buying (assuming 3 year leases)
However, if you allocate lump sum at the beginning and invest it at 4% the total cost will be identical between leasing and buying.
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