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What Is the Difference Between Buying and Leasing a Car?

May 13th, 2010

car-buying-leasing.jpgThe first question you should ask yourself when deciding on buying or leasing a car is which will bring you the better deal. And, rather than only considering the two options, think about buying a used car, too. Each option has its pros and cons. You just need to determine which one is the best option for you.

Buying a Used Car

To make the comparisons fair, assume that you will be taking out a three-year loan on your vehicle that you plan to keep for five years. It probably will not surprise you to learn that buying a used car is the cheapest way to go. Say that you buy a used car for $10,000, make a $2,000 down payment and pay off the rest over three years at 8 percent interest. When you figure in the down payment, the monthly payment, insurance, maintenance and repairs, you will spend about $6,500 in the first year. The real savings comes later. In three years, your car will be paid for. You will probably have increased maintenance and repair costs for a used car, but you will still be way ahead of the game. After five years, you will have spent around $18,000 for a used car.

If Only New Will Do

If you simply do not want to buy a used car, then your options are whether to buy or lease a new one. In the long run, it is cheaper to buy a car rather than lease one because when you buy, you will eventually own the car. With a lease, you will pay slightly less over the course of five years than you would buying, but you will have nothing when the lease is over.

Leasing a Car

Say the leased car you are interested in costs $20,000. You get a three-year lease at 6 percent interest instead of 8 percent with the used, because you get a better rate leasing and buying new than buying used. You put down $1,000. Your monthly payment, insurance, maintenance and repair fees after the first year are slightly more than with the used car, totaling about $6,600. Because of the five-year scenario we are using for comparison purposes, you would have to take out a second lease in order to keep the car for five years. Initiating a new lease requires another $1,000 down payment, and the lease payments will probably be slightly higher. So, after five years, considering the down payment, monthly payments, insurance, maintenance and repairs, you will have spent about $32,000.

Buying a New Car

For a new car that costs $20,000 with a three-year loan at 6 percent and a down payment of $3,000, when you add in your monthly payment, insurance, maintenance and repairs, you will have spent about $11,000 in the first year, considerably more than when you lease, mainly because the monthly payments are higher. After five years, you will have spent about the same as you did with the lease, about $32,000.

Bottom Line

If you have poor credit, little money for a down payment, need to keep your monthly payments low and want a new car, then the lease would be the way to go. In the short term, the lease is definitely cheaper than buying new. If you plan to keep your car for five years, which is the average length of time people keep a car, then buying will be the better deal. If you are open to the idea, buying a used car is the cheapest option of all.

Based just outside of Atlanta, Laura Agadoni has been a writer for 10 years. Her feature stories on area businesses and human interest articles appear in her local newspaper and on various websites.

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