Need a new car? The question is whether — given your budget and lifestyle — you should buy or lease.
Here are the two classic rules.
1. To pay the least over the long run, buy the car outright.
2. But lease if you want to drive a better car than you can afford to own.
Down payments are lower when you lease, compared with taking an auto loan, and monthly payments are lower, too.
When you purchase a car, you pay off an auto loan in an average of about five years. After that, you drive "free" for as long as you like. You become responsible for all repairs, once the car comes off warranty. To save money, consider a factory "certified pre-owned" car that has been inspected and refurbished and carries a manufacturer's extended warranty.
When you lease, by contrast, you never own the car. You pay for its use over a limited period of time — say, three years. The warranty should cover basic repairs. Maintenance costs may be covered in the contract. At the end of the term, you can buy the car at a price predetermined by the contract. Or you can return it to the dealer and lease another car, brand new. For those who go from lease to lease, car payments never stop.
Which approach best fits your needs?
People still working often find it attractive to lease. Driving a fancier car might be good for business (or good for the soul). And constant car payments don't feel burdensome when there's a steady paycheck coming in.
Before signing the lease, be aware of the many incidental fees (such as for acquisition, documentation and title). For example, you'll pay penalties for driving more than 12,000 or 15,000 miles a year unless you buy additional mileage in advance. If you want to give up the car before the end of the lease, you'll owe early termination fees that might run to several thousand dollars.
A crash that totals the car is considered early termination; to protect yourself, always buy gap insurance to cover that unexpected cost. At the end of the lease, there might also be a fee for unusual wear and tear.
Are you currently leasing a car? At retirement, you might rethink. There's good reason to own rather than lease once out of the workforce. For one thing, you probably won't be driving as much, so the car will last longer. As an owner, you'll be able to use it, reliably, for perhaps 10 or 15 years, while making no monthly payments at all.
For another thing, owners are better off on that day when you have to give up driving for safety's sake and start dialing car services for rides.
If you're leasing and turn the car in early, you'll owe the big termination fee. Owners can sell their cars and pocket the cash. Nice.
Jane Bryant Quinn is a personal finance expert and the author of How to Make Your Money Last. She writes regularly for the Bulletin.