Should you buy or lease your next car? Determine what’s best for you

By: 

Money Management

MNCPA

If you’re thinking of replacing your car, you may also be wondering if you should lease or buy the replacement vehicle. Leasing a vehicle used to be commonplace only for businesses because of the tax write-off. But now with deals like zero money down, low monthly payments or zero-percent interest, leasing has become a popular option for the general public.

There are many factors to consider when you’re considering leasing versus buying a car, according to the Minnesota Society of CPAS (MNCPA). Leasing may be a wise decision for one person, but may not make financial sense for someone else.

Think about the pros and cons of each option before you sign on the dotted line.

Making the comparisons

• Advantages of leasing

— Low down payments. Even though a lot of the advertised lease deals assume a down payment, you can often get a better deal just by asking. But don’t forget, the more cash you put down, the lower your monthly payments will be.

— Lower repair costs. With a three-year lease, the factory warranty typically covers most repairs.

— Low monthly payments. Since you are only paying off the depreciation on the car — not its full value — your monthly payments tend to be lower than if you opt to finance the purchase of the entire car over the same period of time.

— You pay sales tax only on the portion of the car you finance.

— Easy out. If you’ve taken good care of the car and it’s in good shape at the end of your lease, you will simply hand over the keys to the dealer and drive away with a brand new car and a new lease arrangement. You don’t have to deal with selling a used car or negotiating a trade-in value.

• Disadvantages of leasing

— Nothing to show for it. Leasing a car is like renting an apartment. Your monthly car lease payment won’t go toward eventually owning the car.

— Lack of flexibility. If you want out of your lease before the end of the agreement, you may encounter a financial penalty. Read the agreement carefully.

— Hidden costs. If you exceed the allowable mileage over the course of the lease, you may be hit with a mileage charge. Also, be aware of any damage costs you will be liable for beyond normal wear and tear.

— Insurance issues. Depending on the type of insurance you carry, it may only reimburse you for the car’s current market value in the event the car is stolen or totaled in an accident. Some lease agreements will include extra coverage to protect against this. Discuss options with the dealer.

• Advantages of buying

— It’s yours. You own it and can do what you want with it, when you want.

— Makes long-term financial sense. Car buying is more economical in the long run unless you buy and trade-in regularly.

— Drive around the world. There’s no penalty for driving excess mileage.

• Disadvantages of buying

— Higher down payment is generally required.

— Higher monthly payments.

— You’re responsible for maintenance costs once the warranty expires.

— Trade-in or selling hassles when you’re ready to part ways with your car.

— More of your cash is tied up in a car, which depreciates.

— Crunching the numbers

One of the reasons leasing a car is so appealing to some is that you don’t have to pay for or finance the entire cost of a vehicle. You’re simply paying for the use of that vehicle over the length of the lease. To help you put a dollar figure on your comparison, consider:

— Total initial payment, which includes the down payment and any extra fees.

— Amount of each monthly payment.

— Number of months in the lease term.

— Possible additional charges at the end of the lease (mileage, damages).

— With a lease, your monthly payment is based on the difference between the vehicle’s transaction price and what it’s estimated to be worth at the end of the lease term. This difference is financed at a particular rate of interest.

— Typically, your down payment and monthly charges will be lower with a leased vehicle than a purchased vehicle, which is why you can usually obtain a better vehicle for the same cash you put down. Most leases will also have the option of purchasing the vehicle at the end of the contract. However, this is often more expensive over time than buying it outright.

• Evaluating your situation

— How is your cash flow? If you’re short on cash, leasing may make more sense because you’ll typically be required to put less money down.

— Are you a new car junkie? Leasing will provide you with a new car every few years.

— How many miles do you drive each year? A typical lease customer drives 15,000 miles each year. If you drive substantially over or under this amount, leasing may not be for you.

— Do you use your car for business purposes? If you are deducting a portion of your car’s depreciation from your taxes, you will be able to deduct substantially more if you lease. Interest paid on loans to purchase a car is not deductible. When you lease, you can deduct depreciation as well as the financing costs. The IRS limits depreciation deductions for certain luxury cars.

— Are you hard on your car? If so, leasing may not be right for you because the wear and tear may trigger damage fees at the end of the lease.

A CPA can help

Whether you lease or buy, a car is a big investment. A CPA can help you analyze your current situation and determine the best course of action with regard to your personal financial plan. Don’t have a CPA? Visit www.mncpa.org/referral to find a CPA in your area.

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