How to Compare Leasing vs. Buying a Car

Detroit and the nation’s auto financing companies, as well as the more prestigious foreign auto producers, are attracting more Americans to a new leasing way of life.

From a financial standpoint, paying cash is still the cheapest way to buy a car. Many people are reluctant, however, to use large sums to purchase a new car at today’s prices. With no income tax deduction for personal interest, leasing a new car may begin to make sense in some instances. It is especially advantageous if you lack the funds for a down payment, don’t want to tie up your cash, or plan to keep the car for only four years or less. (The four-year rule applies: New car depreciation is so fast that a car bought, financed and sold in under four years could bring far less than the unpaid balance on its loan.)

A rough example illustrates the basic economics of leasing: Under one plan you can drive away a new $12,000 automobile for a $225 security deposit and $222 a month for four years, obviously less than 20 percent down and $248 a month payment on a four-year loan with an 11 percent interest rate would cost. Unfortunately, the advantage fades at the end of four years, when you would own the financed car, but would need to spend another $4,884 to buy the leased one.

In addition to basic data such as monthly payments, mileage limit and the cost of auto insurance, a few other crucial items need scrutiny:

  • How much do you pay up-front? A deposit equal to one or two monthly payments is unavoidable and is applied to the lease. Watch out for something called a “capitalized cost reduction payment,” though; it can amount to 10 to 20 percent of the car’s value, payable in advance.
  • What will it cost to get out of the lease early? To keep monthly payments lower, some firms encourage you to take a longer lease than you need. Then they charge a large fee if you decide you want another car.
  • How much are the “disposition fees”? These cover the company’s cost of selling the car. Any more than $250 is too much.
  • What constitutes “excessive wear and tear”? Leasing companies must state the kinds of damage charges they may impose on you after the lease ends. Make sure the description is specific

Attempt to get a contract stating an exact purchase price. Then, depending on used car prices at the end of the contract, you can either buy at a very favorable figure or turn down the option if it doesn’t make financial sense.