Buyer's Guide 
Should I Lease or Buy?
by Eric Schofield and Gary Briddle

Car sales have been steadily increasing over the past five years and there’s no immediate slow down in sight. If you’re in the market for a new car, it is likely that the thought of leasing has crossed your mind a few times. We have compiled some helpful tips to help make the decision making process easier.

As of 1999, there were over 3.8 million cars and trucks leased. That’s four times the number of cars leased in 1986. Out of the 15 million cars, trucks and SUVs being made this year, over 30% will be leased. Why is leasing so popular?

The most obvious reason why leasing has become increasingly popular over the years is that many people feel that leasing affords the average person a "higher echelon" automobile for lower monthly payments than buying would allow. The shroud of mystery that clouded the facts about leasing has been lifted over the years by government regulations. North Carolina, in particular, is a full-disclosure state making leasing a relatively clear cut affair.

Leasing gives the consumer the option of lower payments because you are only paying for the portion of the car that you’re actually using over the term of the lease. Your monthly payments typically are a fraction of what they’d be if you were buying the car.

Here is an Example:
2000 Chevrolet Blazer LT, loaded with leather seats, 4x4, trailering package and sunroof, $30,330 turnkey

Buy: 60 months @ 9.5% with zero down = $638 /mo.
Lease: 36 months with 15,000 miles and zero down =35 payments of $468.36 /mo. (57% residual @ 5.05%, $19,430 buyout)
Need more miles? 36 months with 20,000 miles and zero down = 35 payments of $499.99 /mo. (57% residual @ 5.05%, $18,229 buyout)
*Buyout examples have a $500 disposition fee included in figure

Our goal is to help you decide if leasing is the proper choice for you and to help you decipher the leasing lingo so you’ll be as educated as possible.

Is leasing right for you?
Below are some questions you will need to consider before making a decision on whether leasing or buying will be right for you.

1. How much do you drive your car? If you drive your car more than 25,000-30,000 miles a year – buying could be the better choice for you. Nowadays, a 12,000 or 15,000 mile annual limit is the norm. The benefits of leasing can diminish if you drive over this annual limit due to mileage penalties assessed at the end of your lease period. If you know you are going to drive more miles than the lease allows you should purchase them up front in the lease. Extra miles can usually be purchased at inception for $0.08 - $0.10 versus $0.12 - $0.20 at lease end.
   
   
2. How long do you plan on keeping your vehicle? If you are the type that falls in love with your car and loves to modify it, buying is the better choice for you. Many people who fall in love with their automobiles tend to keep them for extended periods of time, often five to eight years or more. Most lease plans will require a term of 24 to 48 months. We highly discourage you from signing a long term lease. If you feel a long term lease is good for you be sure to extend your warranty to match the time and miles you plan to drive.
   
   
3. How will you use your automobile? If you use your vehicle for business purposes, leasing is a good option for you because it can provide you with substantial tax benefits (you should talk to your accountant or tax preparer for more details). If you use your vehicle for both personal and business purposes, a lease still has many tax benefits for you.
   
   
4. How do you spend your extra cash? If you like to save, invest or pay off high interest credit cards, leasing could be a great option for you provided you fall into the proper category based on the questions above. The extra money you’ll save monthly on a lower car payment could be re-invested in other things. In other words it can greatly effect your cash flow.
   

Depending on how you answered the questions above, you should have a better idea whether you are a good lease candidate or not. Below is a quick run-down on the lingo you’ll need to be familiar with to fully understand the negotiations required to lease a vehicle.

Learn the Lingo

Acquisition fees:
These are fees added by the dealer for preparation of the lease. It is also commonly referred to as the initiation fee. Most manufacturers who have their own leasing programs (GMAC and Ford Motor Credit for example) can waive this when you take advantage of special programs and incentives. However, in most cases, this fee is not negotiable. Be sure to add this fee to the down payment when you sign the lease.
Base interest rate:
This is the rate you pay during the time of your lease.
Cap cost reduction:
Essentially lease jargon for a down payment, trade-in, or factory incentives.
Closed end lease:
This is generally the best way to lease a vehicle because the residual value of the car is fixed and can't be renegotiated when you come to the end of the lease. In other words, at the end of the lease, you’re free to walk away from it without having to purchase the vehicle. You also have the option of purchasing the vehicle at the residual value, even if it’s below the market value of the vehicle. If the residual value exceeds the market value it is not your problem, it is the financial institutions problem as long as you pay for all excessive miles and damage upon turning it in.
Open end lease:
We discourage you from signing an open-end lease because at the end of the lease, the value of your car can differ tremendously from the market value and if that occurs, you would be stuck paying the difference along with the value of the car. Open end leases can be beneficial to companies using 20% residuals, or dollar buyout programs. Check with your accountant or tax preparer in any and all cases.
Gap insurance:
If you car is stolen or if an accident totals the car, gap insurance will pay the amount between what you owe on the lease and what the value of the car is. Your insurance company will cover the cash value of the car but the lessor will treat the accident as an early termination of the lease. Make sure it is in your lease contract and be aware that many finance companies include it in the lease price.
MSRP:
Manufacturers suggested retail price. Enough said.
Residual value:
The remaining value of the car when the lease is terminated. The higher the residual value the lower your monthly payments. In many cases, you will have the option of buying the vehicle for the residual value. If the residual value is lower than the market value, you’ve got yourself a good deal!
Termination fee:
Also known as a disposition fee, these are the funds you pay when you return the car to the dealer so they can prepare the car for resale. These fees will also include any early termination fee. Termination fees can be enormous so find out how it is determined. Your security deposit can also be used to pay this fee.
Total out-of-pocket costs:
If you ad up all the monthly payments, taxes, and your down payment (including trade in) and divide that number by the number of months in your lease you will find this number.
Wear and tear:
It would be a good idea to have the dealership spell out in detail what normal "wear and tear" consists of so you can avoid any unpleasant surprises at the end of the lease term. Make sure to maintain the vehicle as if it were your own, you will be expected to pay for any unusual damage.

If you would like to do learn more about leasing, more information can be found in our Leasing vs. Buying chart.

Leasing is different from buying. Here's how . . .

Ownership
LEASING: You do not own the vehicle. You get to use it but must return it at the end of the lease unless you choose to buy it.	BUYING: You own the vehicle and get to keep it at the end of the financing term.
Up-front costs
LEASING: Up-front costs may include the first month's payment, a refundable security deposit, a capitalized cost reduction (like a down payment), taxes, registration and other fees, and other charges.	BUYING: Up-front costs include the cash price or a down payment, taxes, registration and other fees, and other charges.
Monthly payments
LEASING: Monthly lease payments are usually lower than monthly loan payments because you are paying only for the vehicle's depreciation during the lease term, plus rent charges (like interest), taxes, and fees.	BUYING: Monthly loan payments are usually higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees.
Early termination
LEASING: You are responsible for any early termination charges if you end the lease early.	BUYING: You are responsible for any pay-off amount if you end the loan early.
Vehicle return
LEASING: You may return the vehicle at lease end, pay any end-of-lease costs, and “walk away.”	BUYING: You may have to sell or trade the vehicle when you decide you want a different vehicle.
Future value
LEASING: The lessor has the risk of the future market value of the vehicle.	BUYING: You have the risk of the vehicle's market value when you trade or sell it.
Mileage
LEASING: Most leases limit the number of miles you may drive (often 12,000-15,000 per year). You can negotiate a higher mileage limit and pay a higher monthly payment. You will likely have to pay charges for exceeding those limits if you return the vehicle.	BUYING: You may drive as many miles as you want, but higher mileage will lower the vehicle's trade-in or resale value.
Excess wear
LEASING: Most leases limit wear to the vehicle during the lease term. You will likely have to pay extra charges for exceeding those limits if you return the vehicle.	BUYING: There are no limits or charges for excessive wear to the vehicle, but excessive wear will lower the vehicle's trade-in or resale value.
End of term
LEASING: At the end of the lease (typically 2-4 years), you may have a new payment either to finance the purchase of the existing vehicle or to lease another vehicle.	BUYING: At the end of the loan term (typically 4-6 years), you have no further loan payments.

At the beginning of the lease, you may have to pay your first monthly payment; a refundable security deposit or your last monthly payment; other fees for licenses, registration, and title; a capitalized cost reduction (like a down payment); an acquisition fee (also called a processing or assignment fee); freight or destination charges; and state or local taxes.

During the lease, you will have to pay your monthly payment; any additional taxes not included in the payment such as sales, use, and personal property taxes; insurance premiums; ongoing maintenance costs; and any fees for late payment. You'll also have to pay for safety and emissions inspections and any traffic tickets. If you end your lease early, you may have to pay substantial early termination charges.

At the end of the lease, if you don't buy the vehicle, you may have to pay a disposition fee and charges for excess miles and excess wear.

• the agreed-upon value of the vehicle--a lower value can reduce your monthly payment
• up-front payments, including the capitalized cost reduction
• the length of the lease
• the monthly lease payment
• any end-of-lease fees and charges
• the mileage allowed and per-mile charges for excess miles
• the option to purchase either at lease end or earlier
• whether your lease includes “gap” coverage, which protects you if the vehicle is stolen or totaled in an accident.

Ask for alternatives to advertised specials and other lease offerings.

When you lease a vehicle, you have the right to

• use it for an agreed-upon number of months and miles
• turn it in at lease end, pay any end-of-lease fees and charges, and “walk away”
• buy the vehicle if you have a purchase option
• take advantage of any warranties, recalls, or other services that apply to the vehicle.

You may be responsible for

• excess mileage charges when you return the vehicle. Your lease agreement will tell you how many miles you can drive before you must pay for extra miles and how much the per-mile charge will be.
• excess wear charges when you return the vehicle. The standards for excess wear, such as for body damage or worn tires, are in your lease agreement.
• substantial payments if you end the lease early. The earlier you end the lease, the greater these charges are likely to be.