To Buy or Lease: That Is the Question
(NUI) - The tailpipe is shot. The transmission slips when you climb hills. The left directional needs that special wrist action to get it to work.
Sound familiar? If so, you're probably thinking about getting a new car. And that means you may be puzzling over the inevitable question, "Should I buy or lease?"
Leasing may be a good deal for consumers because up-front costs are minimal, monthly payments are lower and you have a new car more frequently.
According to certified public accountants (CPAs), all the terms of lease vs. purchase must be compared before making a financially sound decision. Here are just some factors to consider:
* Total Cash Flow. Don't focus only on monthly payments, which are almost always lower in a lease arrangement. Instead, look at the overall cash flow involved. If you add in such additional expenses as dealer preparation charges, taxes, possible mileage use fees and liability for damages to the vehicle, and spread them out over the course of the lease, the outcome may be different. Additionally, when leasing, often there is only a minimal down payment required.
* A Good Deal? How do you know you're getting a good deal in a lease? One way is to make sure that lease payments are not greater than what loan payments would be, in line with the proportion that the residual value (buy-back price) is to the purchase price. For example, if the purchase price were $20,000 and the residual value $10,000 (a proportion of 50 percent), lease payments shouldn't exceed 50 percent of what loan payments would be.
* Leasing Company. Gen-erally, dealerships use several leasing companies. Ask for the terms each company would offer. You also can hire your own independent auto-buying/leasing company to negotiate a deal for you. That company then finds you a dealer that has the car you want. CPAs suggest doing some research to find out which method is more economically effective.
* Lease Term. Make sure the lease terms fit your needs. If you know in advance that you'd like to drive the car for 10 years or hold onto it until it's a classic, a lease probably is not a cost-effective option. If you prefer to have a newer or more expensive car more often, leasing may be the better choice.
* Mileage Limit. Can you stay within the mileage limit? If not, there may be excessive fees. In the final analysis, savings from leasing instead of buying generally average only 5 percent.
If you are still uncertain, contact a CPA who can provide objective financial consulting advice, as well as after-tax comparisons if the car is used for business. For more information, visit www.aicpa.org.
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