Deciding whether to lease or buy a car is a bit like deciding whether to rent or buy a house. When you rent or lease, you can afford amenities that might be too expensive to purchase outright; but you are also spending money on something you won't own at the end of your lease. When you buy, you might have to settle for a little less; but since you'll own the car, you will have more freedom to decide when it's time to replace the vehicle, and you'll be able to apply its resale value toward your next purchase. Both can be good options. Choosing the one that's best for you depends on what you need from your car.
Estimate how many miles you typically drive in a year. Total up the mileage of your daily commute to work, add the miles you drive for errands and on weekends, and include the mileage of your vacations. If you drive more than 10,000 miles a year, buying may be a smarter option because leasing companies will charge you for exceeding your contracted mileage allowance, which is usually between 10,000 and 15,000 miles a year.
Find out whether your state's lemon laws, which protect you against defective merchandise, apply to leased cars. Alabama, Alaska, Colorado, New Mexico, Nevada and South Dakota don't extend lemon law coverage to leased cars as of this writing. If you live in a state where your car lease isn't covered by lemon laws, buying may be a better option.
Consider your credit score. If you don't have a decent credit score of at least 660, you may not even qualify for a lease, cautions Smart Money, quoting Marvin Hedrick, finance director at Chrystal Motor Cars in Spring Hill, Fla. According the Hedrick, it's easier to get a loan to buy a car than it is to lease one if your credit is a little bumpy.
Evaluate your car habits. Leasing means that you'll need to make sure your car receives regular maintenance and stays in good shape; otherwise, you will have to pay penalties when your lease is up. If you are lax about oil changes and tire rotations or you let the back seat pile up with junk, buying may be a better choice unless you're willing to change your habits.
Estimate how long you plan to drive your new car. Leases are great if you want a new car every three or four years, but trading in a car you own that often can be a headache, especially if you have to pay off your loan on a devalued car before buying a new one. If you want a long-term vehicle that you can drive for six years or more, buying is a better option.
Determine how much up-front money you have to spend. If you are trading in or selling a car that you already own, be sure to include its value in your total. To buy a car, you'll need a down payment – usually 10 to 20 percent of the total price of the car – plus money for tags, taxes, registration, insurance and your first monthly payment. If you lease, the up-front costs are lower but you should still expect to pay the cost of at least two months' lease plus tags, taxes, registration and insurance when you sign the lease. If you have less money to spend up front, leasing may be a better option.
- If you are considering selling stocks or other investments to rustle up the cash to buy a car, consider leasing instead, recommends Money magazine's senior writer Jerry Edgerton on "That Money Show," which airs on PBS. Your investments may work better for you as investments than as a down payment on a new car.
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