Lease or Buy Your Next Car

What is the best deal for your wheels?

Buying a car is exciting and being knowledgeable can help you be a smart car buyer. To lease or buy is a question several members ask themselves. CME CU is here to help.

Buying a Car

Buying a car is the most straightforward way of obtaining one. You either pay cash or take out a loan to cover the cost. But that does not mean the benefits will outweigh the drawbacks for your particular situation.

Benefits:

One of the greatest benefits of buying a car is you will actually own it one day. That means you'll be free of car payments until you decide to buy another one. Also, the car is yours to sell at any time, and you are not locked into any type of fixed ownership period.

When you buy a car, the insurance premiums are typically lower than if you lease. In addition, by owning a car, you are free to rack up the mileage without worrying about financial penalties or restrictions.

Drawbacks:

The downside of owning versus leasing is the monthly payment, which is usually higher on a purchased car. Additionally, the dealers usually require a reasonable down payment, so the initial out-of-pocket cost is higher when buying a car.

As you pay down your car loan, you have the ability to build equity in the vehicle. However, this is not always the case. Depreciation can take a nasty toll on the value of your car, especially in the first couple of years. Buyers with down payments can end up financing a considerable portion of the car and even find themselves in an "upside-down situation," in which the car comes to be worth less than the loan balance.

Leasing a Vehicle

For those who have never leased a car, the process can seem confusing and geared more toward business owners, who might want to deduct the expense. That is not always that case and there are benefits to leasing a car.

Benefits:

The greatest benefit of leasing a car is the lower out-of-pocket costs when acquiring and maintaining the car. Leases require little or no down payment, and there are no upfront sales tax charges. Additionally, monthly payments are usually lower, and you get the pleasure of driving a new car every few years.

Leases are essentially renting the car for a fixed amount of time (typically 36 to 48 months). You pay only for the use (depreciation) of the car for that period instead of absorbing the full cost of the vehicle. Leasing a car will never put you in an upside-down position.

For business owners, leasing a car may offer tax advantages if the vehicle is used for business purposes.

Drawbacks:

By leasing a car, you always have a car payment because you will never actually own the vehicle. If you don't like that prospect, leasing is probably not right for you.

Mileage restrictions of leasing pose another drawback. If you drive a great deal during the year, purchasing a car may be the better choice. At the very least, you will want to look into an open-end lease, which give you the flexibility to tun in the vehicle after a short minimum term, typically 12 months.

Most leases restrict your mile usage to 15,000 miles per year (sometimes 12,000 per year). If you go over your allotted miles, you'll pay anywhere between 10 and 25 cents for every extra mile.

Insurers usually charge higher coverage costs for leased vehicles. However, depending on your age, driving record and place of residence, that additional cost may be nominal.