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  Lease or buy?  Car leasing versus car buying explained  

Leasing versus buying a car comes down to one very simple question: do you plan on keeping the car longer than 3-4 years? That's it... mystery solved. If your plan involve keeping the car longer than 4 years, your best option is to buy. If its less than 4 years, you are better suited for a lease. Let me explain why.

When you buy a car with cash or a structured payment program, the car becomes your own personal property after the car has been paid for. So you are free to do with it what you wish. People of this category plan on keeping the car until major maintenance is needed, or they finally decide to get a new car. The benefits of owning the car is that after the car is paid for, you have no car payment to pay each month and you can remove collision insurance from your auto insurance policy. Dropping the collision coverage can drop your insurance payments by 50% in some cases, so it has a significant impact on your budget if you're looking to cut costs. Granted, if you are a poor track record as an "Oopsie" driver or have a tendency to hit the proverbial trash can each time you pull into the garage, you might want to weigh your options because a small fender bender can cost $500 or more to repair.

A lease is also a very appealing program if you frequently trade for a new car every 3-4 years. The way it works is moderately complicated, but put simply, you are only paying for the depreciation of the car instead of the whole car itself. For example, if you happen to love the new BMW that costs $35,000 and you decide to use a lease, your payments will be much lower than if you buy it outright. So you lease the car for a term of 48 months, and at the end of those 48 months your BMW is now worth $20,000. For math simplicity, you essentially paid a monthly cost of $15,000 divided by 48 months (not including taxes and insurance). This is contrary to buying the same BMW at $35,000 and paying twice as much each month. Since you trade cars every 4 years, you are saving half of your capital (i.e. cash in your bank account) to use for other purchases. However, the reality is you no longer have a car anymore and having an auto lease requires certain restrictions.

First and foremost, is the mileage restriction. When signing a lease, the dealer will inform you how many miles are allowable on the car. There are several choices you can make, and they typically range between 10,000 to 16,000 miles. The dealer will most likely be amenable to increased mileage if you discuss or bargain with him. Increased mileage allowances will also raise your monthly payments, so pay close attention to the price differences. Also, if you exceed the agreed upon mileage limits, you will end up paying a sizeable penalty to the amount of $0.10 - $0.15 per mile.

Second, you are required to keep full auto insurance coverage on the car. No exceptions! Since the car does not belong to you, its identical to buying the car with an auto loan. Think of it as renting a car for the term of the lease. Bad news is that you have to return it at the end of the lease, but if you grow attached to it you can purchase it directly from the dealer. This could save you a nice amount because if the car is well maintained with low mileage, it might be worth more than the car's estimated value when the lease agreement was signed.

Lastly, an additional advantage of having a lease is the ease of selling the car back to the dealer. It is a haggle free event and if the dealer values you as a customer, he/she might slash the price on a newer model or throw in a few extra perks for free. You also get the advantage of a warranty on the car, and might have gotten some dealer incentive perks like a lower loan rate or free regular maintenance (oil change and tire rotation). If you own your own business and your car is used for work, you can also write off the mileage on your tax return as a cost of business expense.

Leasing is a worthwhile purchase option if you stick to the rules. Take some time to think if you are capable of abiding by them, and if so, do your research online for the car(s) you are interested in and hit the show room. Do not feel intimidated by a pushy or fast talking salesman, and if he/she is making you uncomfortable ask to politely have some quiet time. Sales people are there to serve YOU, not you to answer their questions. Use this to your advantage, and make the experience about you getting exactly the car you want at an acceptable price. If you feel like the deal is not in your advantage, walk away and go to a different dealer. This works very well if you use an online method where you can ask for multiple quotes on a new car, and then play the dealers against one another for the best price.

FYI: The last sentence is a tip I learned from a sales person where SHE does extremely well as a luxury auto sales person.

As always, any questions/comments/concerns are welcome.