The decision to buy or lease a new car or truck should be based on a careful analysis of your automotive needs and financial realities. But, all too often, logical thought processes are tossed aside in a headlong rush to drive home in a shiny new set of wheels - as soon as possible.
For most people, buying a car means financing the deal over a given time period and making monthly payments; eventually, you own the vehicle outright. You will have some equity, or value, in that vehicle and you can, in the future, trade that equity for a lower purchase price for your next car or truck. Buying a vehicle makes more sense the longer you plan on keeping it.
Leasing is renting the vehicle for a specified time period. The monthly lease payment - the rent - is based on the residual, which is a projection of a given vehicle's value at some point in the future. Residuals are based upon past and current resale values and where those values are likely headed; higher resale values are the same as lower rates of depreciation and mean higher residuals, which are expressed as expected percentages of the Manufacturers' Suggested Retail Price at a future date. With a lease you're covering the projected depreciation so that, at the termination of the lease, the depreciation is offset by the total of all the money you paid.
Typically, a lease involves a lot less money up front than would be required for a down payment on a purchase; that, and the significantly smaller monthly payments, allows people to lease and drive more expensive vehicles than they would normally be able to purchase. A lease therefore allows you to drive newer cars more often. And there is no hassle with selling the old car or negotiating the trade-in because, at the termination, you just walk away from it -- or you can still buy it if you like, for that residual value.
But leasing is not a candy store. At the end of the lease you have to return the vehicle in good, non-altered condition; dents, dings, worn-out brakes or the effects of abuse will cost you money. Leases have annual mileage limitations, which may range from 10,000 to 15,000 miles, and exceeding the limit can cost from 15 to 25 cents or more per mile. If your annual limit was 10,000 miles and in three years you racked up 45,000 miles (15,000 over the limit), and the penalty was 20 cents per mile, that's $3,000 you will owe at the lease termination; add that to the cost of your next new car and you'll be making monthly payments for miles already driven. And, if you don't like the thing and want to get rid of it before the lease terminates, you will likely face a pre-payment penalty, which can be thousands of dollars. Finally, if the leased vehicle is stolen or totaled in a wreck, the insurance may cover the market value of the vehicle but not the contractual amount you owe on the lease, so you should check into what is called gap insurance for the possible difference.
Purchasing also has its downsides. The instant you drive the car off the dealership property it begins depreciating and, unless you made a fairly hefty down payment, it will be worth far less than the total of your outstanding loan balance and you will be upside-down before the first traffic light. On a typical 60-month loan you will likely be upside-down until sometime in the fourth year, until the outstanding loan balance falls below the vehicle's declining market value and you finally begin building equity.
Which brings us to the upside. By the time the loan is completely paid off you will own the vehicle and thus have the value of whatever the market says it's worth. You can keep it and continue to drive it with no more monthly payments. You can use the equity as a positive trade-in value on your next new car or truck; perhaps it will make the down payment or more. You can sell it, take the cash and put that toward the next deal or a kitchen remodel. Once you own the car and its equity, it's yours to do with as you please.
There are also warranty concerns. With a purchase, once the vehicle is no longer under warranty the customer is responsible for the costs of maintenance and service. With leasing, most vehicles are still under warranty for the duration of that lease. People who like to drive new cars and don't want to pay for maintenance are good candidates for leases.
Generally, we don't recommend leasing for private individuals. In our experience too many people choose leasing because the lower monthly payments allow them to drive more expensive cars or trucks than they can afford to buy, and they often end up regretting it later. In the long run it's better to purchase the vehicle, take care of it, make the payments - actually, pay it off as quickly as possible - and then keep it for a while and reap the long-term benefits of reduced cost of overall ownership. If you exceed the annual mileage limits, or have some damage to cover, at lease termination you will have pay-off penalties which are then rolled over to the next vehicle, putting you behind before you get started. For most people we recommend carefully choosing the vehicle that best suits your requirements and purchasing it with a thoughtful consideration of your financial realities. Choosing wisely and buying well is a great way to start on a satisfying and enjoyable automotive ownership experience.