Rights In The Vehicle
When you buy a car, you get a bundle of rights along with the transportation, rights that don’t exist for those who lease.
Economic. The car’s equity, which is its value less what’s owed on the car. With a lease, the dealer keeps the resale value that’s left after the lease ends.
Use. You can add personal touches to a car you own, especially if you own it free and clear. Customizing a car might mean for you a different paint scheme, design, detailing or unique wheels.
With a lease, permanent add-ons are off-limits. You must return the vehicle in substantially the same condition and appearance as when you started. You must remove the additions. If they are permanent, you risk being responsible for damages to the vehicle.
Transfer. You must return a leased automobile to the dealership, unless it permits someone to assume your lease. With ownership, you can:
- Sell the vehicle
- Give the vehicle away or leave it to someone in your will
- Donate the vehicle to charity and get a tax break
Leasing VS Buying A Car: Pros and Cons Payments
Typically, leasing affords lower monthly payments than buying and can allow you drive a newer, higher-end car more readily.
When you lease, you’re paying largely for the anticipated depreciation of the car while you lease. This depreciation is the difference between the manufacturer’s suggested retail price (MSRP) and the retained value, or what the dealer thinks the car will be worth at the end of the lease. Depending on your credit, you might avoid having to make a down payment or offer a trade-in.
In a purchase, loan payments generally are higher because you have to payoff all of the price (less the trade-in or down payment), tags, taxes and fees, with interest.
To take advantage of budget-friendly lease payments, you need upper-tier credit. As a rule thumb, dealers treat you as worthy of the best deals with credit scores between 700 and 740.
If you’re score goes below these levels, you may still be able to lease but the payments will cost you more and the dealer might require a down payment. With a score south of 580, a dealer might not offer you a lease unless you bring a co-signer.
Mileage and Wear and Tear
Here, the nod goes to buying, somewhat.
Using a car can cost you money whether you lease or buy. The difference comes in whether you pay directly or indirectly.
When you lease, you incur fees for exceeding your mileage limit and for damage or excessive wear to the car. Depending on the dealer, your lease will cap your yearly usage at 12,000 to 15,000 miles. Lower mileage limits could afford you smaller monthly payments, but you run the risk of paying fees if you go over.
The fees could run 10 to 20 cents per mile over the cap. For example, if your lease allows you 15,000 per year and you drive 20,000, those extra 5,000 miles could cost you an extra $500 to $1,000, depending on the dealer and its over-the-limit fees.
When your buying or own the car, you have no mileage restrictions and you usually don’t answer to a dealer for dings and damage. (If you’re borrowing, the bank may require that you fix damage or turnover insurance proceeds to apply to your debt.)
However, you pay in a sense for the miles and wear you inflict on your car through depreciation. This translates to a lower resale or trade-in value when you want to change cars or simply want to rid yourself of the car.
With a lease, you’re likely to spend less, if any, time not covered by a vehicle warranty. If you lease a new car, the typical dealer will offer a bumper-to-bumper warranty to cover mechanical and other defects for three years or 36,000 miles.
In some states, new leased vehicles are covered by lemon laws. These statutorily-imposed warranties require that the car be free of substantial defects and dealers get so many opportunities to fix them.
If the attempts fail, the car earns the title “lemon” and you either can get a refund or a replacement. Depending on where you live, the lemon law grants you effectively either a two-year or 24,000 mile or a three-year or 36,000-mile warranty.
Considering that the usual lease is two to three years and assuming you heed the yearly mileage limits, the majority (if not all) of your lease is under warranty. Of course, you’re less likely to have a new car if, because of your credit or budget, you have to lease a used vehicle with a lower starting value.
Used vehicles carry little, if any, warranties.
When you buy, you’re likely to own the car longer than the statutory lemon law or the dealer or manufacturer’s warranty, even if it goes to five years or 60,000 miles. This translates to a shorter time for warranty protection According to Kelly Blue Book in 2012, car buyers kept their rides on average for almost 72 months. For used cars, the average ownership period was almost 50 months.
Whether you buy or lease, many pre-owned vehicles come with electronic, power, or computer-run controls. Malfunctions could involve pricey repairs.
Ending The Term
The buying option affords less costly options when you want to turn in the car.
Generally, ending a lease prematurely can cost you early termination fees and you still may owe the balance of the lease payments.
In leases, the dealers can’t assure themselves payments if the lease term doesn’t run its full course.
Your dealer may permit someone to assume your lease payments and online services are available to match those interested in swapping leases.
With some finance companies or banks, you won’t face a fee for paying off a car loan before the loan ends. Whether you face a prepayment penalty depends often on how the loan is structured.
If the finance company pre-calculates the interest, you’ll see it reflected as part of the outstanding balance. In other words, you pay the interest in full even if you pay off the car loan early.
As a selling point, the dealer or finance company might not impose an early termination fee if you pay simple interest. In this loan, interest is computed based on the outstanding balance, so the more you pay towards the principal of the loan, the less interest you’ll face.
You need to review your contract to see if it includes an early termination fee.
Tax Aspects Of The Two Options
Sales taxes. Leasing normally carries a lighter sales tax burden than purchasing. In most states, you pay sales tax only on the actual payments if you lease. By contrast, for purchasers, the sales tax applies to the entire price of the vehicle.
Deductions. If you own a business, a vehicle lease offers more tax relief. You can write off your entire lease payment immediately as a business expense against revenues. In a car loan, only the interest is deductible. You can’t claim the principal part of the loan payment as an expense because it reduces the amount of the loan’s principal balance.
By purchasing, you can access tax benefits that are closed to those who lease. If you itemize tax deductions, the property tax charged by your local government on a car’s value is deductible. Business owners can claim the property tax as an expense.
When you grasp the pros and cons of leasing or buying, you can choose what best fits your job, lifestyle, credit, finances and household. Your current situation may also determine whether you can access the benefits or avoid the burdens of each path to having transportation.