EchoBay Expert: I'm trying to make the decision of whether to get an auto loan and buy a new car or go the easier route and just lease it. I usually keep a car for three to four years and I have $6,000 saved for a down payment if I buy the car. Which is better or will save me more money; lease or buy?
Loyal Reader: Before saying definitely whether a lease or buy is best, you will also need to know how many miles you plan to drive the car and how well you treat your vehicles. Going over on the mileage (usually 10-15,000/year) or excessive wear and tear can quickly exclude a lease from being the best deal for you.
That said, let's compare the two. Typically, if you will only have the car for three years, you are better off with leasing. This assumes you can stay within mileage requirements and will treat the car well. This is because you will only be paying for the usage of the car. The dealer will set a lease price or capitalized cost - this is what the car is worth the day you leased it. He will also set a residual amount, which is what they think the car will be worth at the end of the lease.
You will only pay for the difference between these two amounts. If you lease a car with a price of $24,000 and a residual value of $18,500, you will only pay for $5,500 over the term of your lease. Compare this to buying the car and paying for the full $24,000 over the life of your auto loan and you can easily see how your payments will be less with a lease.
Leases typically also require low down payments, which means you can put your $6,000 to use elsewhere. If you do decide to lease, be sure not to extend your lease beyond the term of your warranty. If your vehicle comes with a three-year warranty, you should not lease any longer than three years. But if you cannot stay within the mileage requirements or if you plan to keep the car longer than the warranty, a car loan may be your best option.
Although your payments may be larger with an auto loan, you will own the car. You will not have to be concerned with excessive mileage, wear and tear or what will happen if for some reason you can't fulfill the terms of your lease.