Auto financing: leasing versus buying: let cost and personal requirements dictate your decision

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Lease versus buy. New car versus used. It's a common predicament nearly every car buyer confronts. While experts say each has its benefits and drawbacks, the decision on what to buy, and how to finance it, should have less to do with emotion and more to do with personal circumstances and financial faculty. "The first thing that you have to think about is what can you afford," says Monique Tate, diversity marketing manager for Chrysler Financial, one of the largest auto financing companies in the world. "A rule of thumb is the combination of large big-ticket items, like your car, mortgage or rent, should be between 20 and 36 percent of your gross income." Tate, who regularly speaks to minority groups about financial literacy, says that while about 70 percent of car financing is conventional loans, the popularity of leases has increased, but there are points to consider.

WHEN TO LEASE

A car lease offers the chance to have a new car every two or three years with no major repair risks. Lease agreements typically run for 24 to 48 months and are made up of three parts: a depreciation charge, a finance charge and sales tax.

If having a car that has the latest safety features and is always under warranty is your preference, then leasing may be the way to go. Another advantage to leasing is that (for the same car, same price, same term, and same down payment) monthly lease payments will be 30 percent to 60 percent lower than car loan payments. But financial experts warn that the biggest mistake a car buyer can make is to choose to lease solely based on the lower payment, which can be manipulated to make even the worst deal look good.

Lease contracts limit the number of miles you can drive, usually between 10,000 to 15,000 miles per year, and there's a charge for each additional mile. Further, if you end your contract early, you will usually have to pay termination charges and all remaining payments.

If you like to customize your car, then leasing may not be a suitable option. A leased car belongs to the leasing company--not you. Therefore, you cannot make modifications and install custom equipment that alters the car.

And with leasing, you will always have a car payment. So if you like the idea of having ownership, then buying a new car through a conventional loan may be the best choice for you. Another big car-buying decision is whether to purchase a new or used car. While most new cars have all the latest bells and whistles, they lose about 25 percent to 35 percent of their value in the first two years--and up to half of their value after four years. If you're not the type of person who has to have that newcar smell, then buying a used may be the way to go.

And even though the chances for unwarrantied repairs are higher with a used car, today's used cars, especially the inspected vehicles many dealers refer to as "pre-owned" or "certified," are usually reliable, and many come with extended warranties. Financial experts say that other costs--including car insurance, gasoline, maintenance, registration and taxes--still have to be taken into consideration. These expenses probably will be higher for a new car, but are often offset by the lower interest rate generally available on new-car purchases versus used cars. Budget and loan calculators on the Internet can help you decide how much car you can afford. "I strongly encourage people to educate themselves," Tate says. "Understanding the implications of your car-buying decision is the first step. Purchasing a car is not all about self-gratification. It's about doing what's best for you financially. Research and education is key."

COPYRIGHT 2008 Johnson Publishing Co.
COPYRIGHT 2008 Gale, Cengage Learning