Authored by Jayant Row in Automotive
Published on 04-20-2009
It is your personal circumstances and preferences that will determine whether buying or leasing is the best alternative to have that set of wheels. You want to be away from making those monthly payments, than think of buying your own car, but if you are looking to change the car you drive every four years or so you must consider leasing. So make up your mind and read up on the two alternatives before you venture into that car showroom.
Buying a car
Buying a car is creating an asset for yourself in the future when you have fully paid for the car. At that time you will be free to sell your car or trade it in for a better model. Owned cars have lower insurance premiums and also allow you full freedom in the amount of running that you do, without any risk of penalties.
Monthly payments on owned cars are however higher than on leased ones. You would also be expected to make a down payment of reasonable value before you can get financing for the car. Depreciation takes a big bite of the value of the car during the initial stages and therefore the car may actually have no equity value even when you have paid for most of it.
Leasing a car
Leasing a car does not require you to make any down payment and also no payment towards any sales or other state taxes. Monthly payments are lower than you would make if you were buying the car, and you would have the option of changing your car every few years, if you want to. When you lease the car you are in effect renting the car from the dealer, for a fixed period of 3 to 4 years. You pay for the use of the car and are in way concerned with the depreciation or its effect. Consider leasing if buying is not an option and you are not willing to take a loan to buy the car. If you are in business, leasing offers further tax advantages if the car is used for business purposes.
When you lease a car you always have to make that monthly payment whether you are in a position to or not. You will never really own the car and once the lease period is over you would have to return the car to the dealer you leased it from. You would however have the option of buying the remaining value of the car from the dealer and convert your monthly payments into loan payments. When you lease a car, a dealer also imposes a limit on the mileage that you can use. This is generally about 15000 miles per year and if you exceed this you would have to pay the dealer an agreed charge for the excess mileage. This is about 15 cents per mile for cars which do not fall in the luxury bracket. Insurers would also charge higher for leased cars. Be wary of any clauses in the lease agreement for vague clauses regarding excess wear and tear, as this could cost you quite a bit at the end of the lease. Your lease could be close ended or open ended. A close ended deal would allow you to walk away at the end of the lease after returning the car to the dealer. In an open ended lease you would have to purchase the car from the dealer at its residual value once the lease is over.