The decision to buy or lease a new vehicle is one that comes with plenty of advantages and disadvantages to each option. A few defining variables to bear in mind when making the choice are the mileage which will be put on the vehicle, available cash flow, and whether or not ownership is paramount to your enjoyment of the vehicle itself.
With leasing, one is essentially borrowing the difference between the sale price of the vehicle and the amount which it is expected to depreciate over the course of the lease terms with regular wear and tear. This amount is referred to as the “residual value”. For example, assume that the residual value of the lease vehicle in question is $10,000.00, whereas the RRP is $16,000.00. As a lessee, you will be responsible for the financing of the residual value, or in this case, $10,000.00. Even with shorter lease terms, there will always be a lower monthly payment required to finance £10,000.00 than $16,000.00. In a nutshell, that is the best explanation why a monthly lease payment is typically lower than a monthly loan payment.
Since the average length of a lease term is between two and four years, you are typically going to be driving a vehicle in the best years of its life; will nearly always be fully covered under the vehicle manufacturer’s warranty; and driving should be on the whole relatively problem free. There is also the “upgrade factor” to be considered; that is, at the end of the lease terms, you will have the option to trade up to the latest and greatest model – essentially, leasing allows you the freedom to keep up with the Joneses.
Besides the freedom that comes with owning a vehicle outright, the financial freedom over time is also something to bear in mind. If one was interested in purchase of the $16,000.00 vehicle from the leasing example, and that person did not have $16,000.00, assuming no down payment, that person would be responsible for either taking out a loan for the total amount or negotiating financing options with the vehicle salesperson. Though the accrued interest over a five year loan is somewhat of a drawback, the overwhelming advantage of purchasing is the fact that after five years, the monthly payments would no longer be a concern, and the vehicle (as well as the equity attached) become the direct property of the person in question.
Of course, over time there will be major maintenance bills attached to the cost of owning a vehicle; however, the fiscal impact of these routine upkeep expenses can be lessened greatly by driving responsibly and taking care to ensure that regular service appointments are attended to in a timely manner.
With outright ownership, there is also the advantage of having the option to use the vehicle as a trade-in for a down payment on a future vehicle purchase.
The Bottom Line
For a person who likes the idea of having the flexibility to upgrade vehicles every few years; likes the security of fixed cost motoring and having very few concerns about reliability; the premium inherent to leasing options is likely a price that is worth being paid.
However, with outright purchase, one may very well find it easy to come out on top if they can be disciplined with their re-payment schedule, commit to regular maintenance of the vehicle, and resist the temptation to perpetually upgrade their ride. Outright purchase might also be the best possible option for motorists who have higher or unpredictable mileage requirements, as there can be relatively hefty fees associated with excess mileage put onto a leased vehicle outside of the pre-negotiated terms.
As in all things, the decision to lease versus purchase comes with pros and cons to each alternative; however, with some time spent considering the options available, you are sure to make the decision which will most positively affect you.
Bradley Taylor is a writer who focuses on super cars, future car technology, start up businesses and keeping up-to-date with companies like Mercedes, Volkswagen and Jardine Motors. In his spare time he can always find time for classical music and you can always find him on Twitter and Google Plus.