1. Do you need your cash?
If so, leasing makes sense, because usually you will put less money down than if you buy. In many cases, dealers will waive a down payment. You need only come up with $1,000 to $2,000 for fees, the first month's payment, and a refundable security deposit. Sales tax is usually paid monthly as part of the payment. Dealers often will allow you to roll many of the fees into the monthly payment as well by adding them to the price you pay for the car. If you buy a car and finance it, you could easily have to put 10% of the purchase price down as well as 6% to 8% sales tax -- perhaps $9,000 on a $50,000 car. You are building up equity, but current cash needs may be more pressing.
2. How often do you want a new car?
Leasing is attractive for people who want new wheels every three years or so. It saves you the hassle of selling your cars, and allows you to move from car to car with relatively steady low monthly outlays and low down payments. But don't lease if you like to buy a new car every year. Ditto if you like to buy one every seven or eight years. A purchase allows you to either buy a new car impulsively when you have a cash windfall or to forestall a purchase, nursing your old car along, if your income drops. With a lease, you lose a good deal of control over those decisions. If you foresee owning the same car for seven years or more, you'll save money by buying. That's because with a lease, you walk away from a car just when depreciation slows and -- under long-term financing -- equity begins to build.
3. How much do you drive?
Check your odometer. It's been keeping track of your driving habits for you. The ideal lease customer drives 15,000 miles a year and maintains a car in good condition. (Fifteen thousand is the average yearly amount you are allowed in most leases. Anything above that and you have to pay extra.) If you drive substantially less, you may be paying for depreciation you are not causing. You ought to think about buying. If you drive substantially more and still want to lease, you should negotiate the cost of the additional miles up front. After the end of the lease, many leasing companies charge 15 to 20 cents a mile for the additional miles you have driven, compared with 10 cents a mile if you buy them up front.
4. Do you use your car for business purposes?
If you are deducting a portion of your car's depreciation from your taxes, you will be able to deduct substantially more if you lease. Interest paid on loans to purchase a car is not deductible. But when you lease, you can deduct depreciation as well as the implicit financing costs. The IRS does, however, limit depreciation deductions for certain luxury cars.
5. Do you worry about your car's resale value?
If you routinely cart around carpools of kids, a few dogs and lawn maintenance equipment, there's a good chance you will inflict some damage on the car's interior, which you may have to pay for later when you turn it in. So, if you're hard on your car, leasing may not be right for you. Ironically, you should also consider buying if you keep your car in immaculate condition. That way you can build up some equity and take advantage of its spotless interior or any improvements you've made when it comes time to sell. But, keep in mind, one of the advantages of leasing is that you get to lock in a resale value now. All those lease agreements mean lots of used luxury cars will turn over in two years, depressing the market value of all of them. If you worry about your car's resale value, leasing can provide some security.
6. How stable is your life?
If you foresee a move, kids, a divorce or a new job, and you don't have a clear idea where you will be in two or three years, don't lease. The money you save on a low down payment and low monthly outlays could be wiped out if you have to terminate early. When you cancel your lease early you typically owe all remaining payments minus allowances for the depreciation that hasn't happened yet. Basically, you should be almost certain you can stick with the terms of the lease before you sign on the dotted line.
7. Do you trust the company you would be leasing from?
When you buy, you don't have to trust the bank. You just need its money. But leasing means you are entering a complex financial relationship with a company. It's best to lease from an auto maker or a large leasing company with a substantial interest in repeat business. And check to see if your lease includes gap coverage, which protects you if your car is stolen or totaled. Most major leasing companies provide it. Also make sure you have a purchase option at a fixed price. Walk away from leases that don't offer both.
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