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Leasing Vs. Buying Your Next Car

It usually makes financial sense to purchase a vehicle, especially if you drive more miles than a fleet of FedEx trucks and have kids that may transform the interior into a scene from War of the Worlds. In other circumstances, it makes sense to lease. If you're deciding whether you're going to pay for a new car or lease one, it's a good idea to check out some of the differences between the two ways of getting your new wheels.

Here's some information to help you compare.

Buying - It's yours. You own it and can keep it as long as you please.

Leasing - It's not yours. You use the vehicle, but you must return it to the owners at the end of the term. You do usually have the option to purchase it rather than renew.

Buying - Again, it's yours. Modify that bad boy all you want. If carbon fiber trim, a Dinan exhaust, and a spoiler big enough to seat your family for Thanksgiving dinner float your boat, go ahead. Knock yourself out.

Leasing - Again, it's not yours! The lessor wants that ride back in sellable condition. You'll need to remove any modifications. If the addition or removal of custom parts cause any residual damage, guess who pays to fix it? That's right, you! Renting a sedan and returning the Batmobile might cause you a few issues.

Initial Costs
Buying - Cash price (if you purchase it outright) or your down payment, plus taxes or fees. If you don't use cash, include financing cost in this calculation!

Leasing - Typically, you'll pay the first month's payment and a security deposit (which is refundable). You will also have taxes and fees to pay, and potentially a down payment.

Buying - Generally, monthly loan payments will be higher due to paying off the entire balance owed on the vehicle, plus interest and possibly other fees.

Leasing - Payments are usually lower per month since you're only paying vehicle depreciation during the time you've got it. There'll still be interest and other fees, though.

Early Termination
Buying - You're the owner, so you can sell or trade the vehicle in any time you like. You can use any money made from the sale to pay off the outstanding balance.

Leasing - Not so easy on this one. Early termination fees will apply if you decide you want out. These fees can cost almost as much as continuing the lease! Check the small print on your contract.

Returning the Vehicle
Buying – It's up to you to sell the car. You can use it as a trade-in for another vehicle, though.

Leasing - It's a lease, and it's easy to return the car at the end of it. You just pay any final fees and head off into the sunset.

Buying - The value of your vehicle will depreciate over time, but whatever cash value it has is all yours. Don't spend it all in one place -- unless you're trading it in.

Leasing - It's not yours, so any future value or depreciation doesn't affect you.

However, you also don't have any equity.

Buying - Have you always wondered if driving far enough will cause your odometer to circle back to all zeros? Go right ahead and find out. It's your car. Just remember that higher mileage will lower the resale or trade-in value a lot.

Leasing - Better off just flying coast-to-coast. Leases limit how many miles you can drive, normally to around 12,000 or 15,000 per year. A higher mileage limit is sometimes open for negotiation, but there'll be extra charges either way.

Wear and Tear
Buying - Other than lowering the resale or trade-in value, you don't have any worries about wear and tear.

Leasing - It's best if you drive like a saint. You're held responsible for exceeding normal wear and tear. Could be a nasty bill at the end if you're not careful.

End of Term
Buying - At the end of the loan term, which is typically four to five years, you have no further payments and have built equity to help pay for your next vehicle.

Leasing - At the end of the term, which is typically two to four years, you'll have to finance the purchase of that car, start a new lease, or you'll have to buy a replacement vehicle.

How Leasing Works
In some ways, taking a lease is just like taking out a loan, but you need to understand the differences between the financial workings. When you lease, you borrow the car's entire value, minus a down payment or trade-in you may have applied towards it.

What's the same? - By driving away in a $12,000 leased vehicle, you're tying up the entire $12,000 given to the dealership by the finance company, just as if you purchased the car with a loan. Just like a car loan, you'll be paying that monthly interest on the total, minus whatever's paid back as time progresses.