Buying a New Car Versus Leasing

In the past, we've looked at the "buy versus lease" equation from the perspective of a relatively healthy economy. In a robust economic environment, there are more benefits to purchasing a vehicle than car leasing. The only exception is the inability to drive a new car, truck, or SUV every two or three years. Now that the economy has become thoroughly ravaged, it's worth taking another look at the comparison.

In this article, we'll approach the issue by first revisiting how the leasing process works. I'll describe the key factors that influence whether this type of deal is more appropriate during a sluggish economy. I'll also explain a few of the dynamics that have changed in the industry over the past year.

How The Process Works

The negotiations for a lease are similar to those when purchasing a vehicle. After choosing the model you'd like to drive, you and the dealership need to agree on the price. This price is referred to as the capitalized cost. Much like your monthly payments on the purchase of a car are based upon a financing interest rate, your monthly lease payments are based upon a money factor. Incidentally, dealerships often try to obfuscate the money factor in the same way they obfuscate the interest rate. That should imply the importance of negotiating this factor upfront.

In addition to the purchase price, you and the dealer will agree upon a residual value. This is the value of the leased vehicle at the time you return it to the dealership. The lease agreement will detail annual mileage caps, maintenance items, turn-in fees, and other factors that can be negotiated.

Does Today's Turbulent Economy Change Things?

The question is whether it makes more sense to choose a leasing arrangement over buying a car outright given the current recession. Indeed, the industry has gone through significant changes over the past couple of years. Credit markets have tightened, which has made it far more difficult for consumers to qualify for auto loans. Automakers and dealerships have responded by expanding their lease portfolios.

For a certain type of prospective car buyer, leasing arrangements are more attractive than ever. Not only are dealers more willing to offer better terms, but buyers who may want to get rid of their vehicles after a few years can simply turn them back into the dealership. They won't be forced to unload their vehicles on a soft market.

The Frugal Driver Is Better Off Buying

Even given the advantageous leasing terms offered by dealerships, most frugal drivers will be better off buying their vehicles outright. Once depreciation has been removed, the cost of occasional repairs and the replacement of worn parts is far lower than a perpetual string of monthly payments.

The lease industry has become more attractive for the buyer that places a high value on driving a new car every few years. For most drivers, buying and maintaining the same car for its driving life is far less expensive.

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