BUY OR LEASE?

Everybody’s Uncle,

My friends favor leasing cars. They like the lower monthly payments and the ease of unloading the car after the lease is up. Ownership appeals to me. Which is better, buy or lease?

Nephew,

If you don’t mind paying for convenience and all runs smoothly a lease can work for you. Financially, buying has the edge.

Leases establish miles allowed over the term of the lease. If your three -year lease allows 36,000 miles but you return the car with 26,000 miles, you pay for 10,000 unused miles. If you return it with 46,000 miles you pay for the extra miles. Ten thousand extra miles at 15 cents per mile means an extra $1500 charge at turn in. Changes of residence or business locations are not always predictable and can seriously effect total mileage.

Bottom line: unless you hit 36,000 miles right on the head you will either pay for miles you did not use or pay for additional miles at turn in.

Leases allow for ordinary wear and tear but serious damage is your responsibility. Assume, on the first week, a fallen tree pancakes your $30,000 car with $22,000 of damage. Insurance covers the damage but you might not want to drive a repaired wreck for three years. As owner you can sell the car for salvage, eat the loss, and buy another car. Breaking a lease can add time and costs to the process.

A minor dent or scratch could occur in the last month of the lease. An owner could buff it out, touch it up, live with it, or settle for low cost restoration. The lessor might insist on a higher standard of repair. Sometimes disputes end in ugly conflict or court.

Cars depreciate after purchase or lease. Leasing does not change depreciation. Purchase payments are higher because the buyer is paying for equity in the vehicle. Assume a $30,000 car leases for 5 years at 400 per month. After 5 years the lease costs $24,000. Buying the car at $550 per month costs $33,000. If the car has a residual market value of $12,000, the buyer paid $9,000 more but has $12,000 equity, a net gain of $3000. (The amount could be greater or less depending on interest rates and other variables.)

Leases often require low deductible insurance. Low deductibles can raise insurance costs hundreds of dollars per year.

Some people are fanatical about maintenance, others indifferent. Leases assume average or worse. If your standards are high the vehicle will have greater resale value -- another gift to the dealer if the car is returned at the end of the lease.

Buying the car at the end of the lease is often a possibility but not always a certainty. In the case where you fall in love with the car, maintain it to a fault, have low mileage, find no difference in the newer models, and want to buy it, you might be out of luck. Do not except the salesperson’s opinion. Check the contract carefully; ask an attorney.

If the car has 76,000 miles you might have to decide among unpleasant alternatives. Surrender the car AND $6000, buy the car at market value of $12,000 PLUS dealer markup, extend lease, the lessor has the options.

Owning a vehicle means you have the options. You can postpone acquiring a new vehicle and enjoy low annual cost. Your personally maintained car might serve a “coming of age” driver or mom’s shopping needs. It could bring an excellent return in the open market.

One argument often used to promote leases is maximizing cash for other moneymaking activities. EU doesn’t know of many surefire ventures that guarantee returns exceeding the higher cost of leasing.

Many people take leases because they have a month to month budget. You might get more car for the money in the short run but in the long run buying is usually the better choice.

Everybody’s Uncle