Put simply, deciding whether to lease or buy is a matter of personal preference and each option has advantages and disadvantages. While there are financial differences between a car lease or an auto loan, the most important things to consider is your lifestyle and your preferences.
What kind of payment do you prefer to have?
Typically the payments for a car lease are less than that for an auto loan. This is because on a lease you are only paying for the amount of the vehicle that you use. If you lease a $20,000 car and the dealer decides it will be worth $12,000 at the end of three years, you will only pay for $8,000 along with a finance fee over three years.
However, if you buy the same vehicle and finance it for three years, you will pay the entire $20,000 over three years. The downside to leasing is that at the end of three years, you simply turn the car back into the dealership and have nothing to show for your three years of payments. For those who bought, they now have an asset that can be sold or they can continue to enjoy driving their vehicle with no car payment.
Do you have a down payment?
Many times a car lease requires a lower down payment than an auto loan does. This is particularly true if you are financing your car through a bank. Some dealers offer car leases with as little as $1,000 down. This can be a great deal, especially if you have your eye on an expensive luxury car. If you are looking at a $40,000 vehicle and your bank requires 20% down, you could be out $8,000 on the down payment alone. Generally, if you do not have a large down payment or simply don't wish to put down a lot of money, a lease can be a great way to go.
How often do you plan on getting a new car?
If your answer to this question is every few years, then leasing is probably right for you. However, if you answer that you are planning to drive your car until it can't run any more, then buying would be the right decision for you. Generally, if you are going to keep the car for three years or less, you are better off with a car lease than an auto loan.
Do you prefer to rent or own?
When you look to lease vs. buy, you are essentially looking at whether you would own or rent. When you lease a car, you are paying for the right to use the vehicle. When you buy a car, you can do with it as you wish because you own it. Compare it to renting a home. With a rented home, you generally cannot paint or make alterations to the house and you must keep it in good condition or risk owing money when you move out. However, if you own a house, you can make any changes you please and take care of the house or not, it's your choice. The same is true when looking at a car lease vs. buy decision.
How many miles will you drive?
In a car lease, you will only be allowed to drive a certain number of miles each year. It is generally limited to 10,000-15,000 miles per year. If you go over your allotment, you will be charged per mile for the additional mileage. You will have to pay this charge at the end of your lease. If you plan to drive more than the mileage your lease allows, it is probably your best bet to buy the vehicle with an auto loan.
Is there a possibility you won't fulfill the terms?
A lease is a binding contract for a pre-set time period. Once you sign a lease for three years, you are required to make the payments for that term. If for some reason you cannot make the payments, some lenders have special stipulations that can help you get out of your car lease but this is rare.
With an auto loan, you can do as you please. If you want to sell the car after only three months or after you have driven it for ten years, go ahead. You own the vehicle and can sell it when you would like.
If you do decide to lease, make sure you do not lease for longer than the warranty on the car. One of the major advantages to leasing is that you generally never hit the point where the car begins to cost you money in repairs and major maintenance.
How's your credit?
For the dealer, there is more risk with a car lease than there is with an auto loan. Because of this, the credit requirements are usually stricter for a lease than they would be if you were buying the car. Be sure to check your credit before you enter the dealership. Any blemishes on your credit report could prevent your from being able to be approved for the lease.
Will you use the car for business?
For business owners, a car lease can have the added benefit of being an expense on their tax returns. Of course, you should always check with your tax advisor on this matter before leasing a car. This can be a great extra if you own your own business.
As you can see, there are many things to consider when you are trying to decide whether to lease or buy. Be sure you look at the overall picture and how much you will spend over the long haul when you are making the decision.