It is worth taking the time to understand the differences, and financial specifics, of committing to an auto lease versus an auto ownership before embarking on one of these financial avenues. While part of the decision involves crunching the numbers another part taps into your personality type. In general an auto lease usually involves lower monthly payments (more on that below) and the ability to trade up to a new car every three years. However, at the end of the leasing period (usually three years) you will not have a car and will need to renegotiate to a new lease—or decide to purchase your leased car at that time. On the other hand, when you purchase a car you will make your monthly payments and at the end of your auto loan have an auto asset that is yours to control—and have built equity if (and when) you decide to shop for a new vehicle.
Let’s delve a little deeper. Leasing allows you to get into a new car with substantially lower costs but comes with some serious drawbacks. For instance, depending on how much you drive, your finances, and your long-term goals, buying a car might be the better idea
So first let’s understand the lower costs that are associated with an auto lease. When you lease a vehicle, much like you do for an auto purchase, you negotiate a vehicle cost. However lease customers, unlike vehicle buyers, are only responsible for the difference in price they negotiate and the vehicle’s expected value at the end of the lease—this is known as residual value. So imagine you decide to lease a new vehicle that is worth $23,000. If you were
a buyer, you would need to finance the entire $23,000 plus interest and other finance charges, taxes, and fees. Of course that figure could be considerably lower if you have a decent trade-in vehicle and a down payment. But for a lease you would be responsible for the residual value ($9200) plus interest and fees.
Leasing Pros and Cons
Here are a number of considerations when comparing vehicle leasing vs. buying:
- As discussed, lower monthly payments.
- Often little down payment required as compared to vehicle purchase.
- No need to sell vehicle at end of lease—drop off at dealer and be done.
- Car under warranty for major issues.
- Ability to have top technology and security features associated with new model vehicles.
- Update to a newer model at end of lease.
- Limited mileage allowances—car dealers want to have the highest resale value possible when you return your leased vehicle—so they limit your mileage allowance to around 10,000-12,000 miles per year. That may be a challenge to most of us in New Mexico. And if you go over, you’ll have some steep excess charges.
- Excess wear-and-tear fees—this may cause stress especially if you have small children or animals.
- No asset or equity at end of lease.
- Usually requires higher credit scores than to get into a car loan.
- In addition to full insurance coverage, you may need to purchase GAP insurance—as protection in case of vehicle theft or vehicle total loss (accident).
- As you pay down loan, you build equity in vehicle asset.
- Once loan is paid, car is yours.
- No mileage restrictions—especially important for those long New Mexico drives.
- No excess wear fees or customization restrictions.
- Customers with less than perfect credit can still qualify for a vehicle loan.
- Enjoy State ECU’s 60th Diamond Anniversary Summer Auto Loan program—lock in a great, low auto loan rate and receive $160 cash back and 90 days with no payment.
- More expensive overall—at least in short term.
- Down payment may be necessary—and could be quite a bit.
- Need to be aware of depreciation.
- Once warranties expire (if new car), you will be responsible for major maintenance issues.
Every customer has a different outlook and financial picture when it comes to the leasing vs. buying equation. Some of the most important considerations are how many miles you drive each year and your credit history and lifestyle. Want to learn more about car loans, how to refinance an auto loan, and best car shopping tips? Set up a one-on-one consultation with our State ECU Member Representatives who would be happy to answer your questions and concerns.