Leasing versus Buying a Vehicle

John Eva
May 23, 2006

When preparing to purchase a vehicle, the most common dilemma faced is whether to lease the vehicle or buy the vehicle. Both options present attractive advantages, along with some disadvantages. An example of the lease verse buy dilemma can be applied to a vehicle of any value. If you are planning to purchase a vehicle that is worth $10,000 or a vehicle that is worth $60,000, there are two main ways to pay for this vehicle.

Whether you plan to lease or buy, you will most likely be making a monthly payment. If you choose to lease the vehicle, you will be paying a lower monthly fee but you do not own the vehicle. If you choose to buy the vehicle, your monthly fee will be higher, but it will be yours once you complete the payments. When considering both options, it is extremely important to understand the similarities and differences between leasing a vehicle and buying a vehicle.

Leasing a Vehicle
When you decide to lease a vehicle, your payments are based on two main charges: a depreciation charge and a finance charge. The depreciation charge is used to compensate the leasing company for the portion of the vehicle's value that is lost during the term of the lease. The finance charge is the amount of interest on the money that the lease company has invested in the car during the term of the lease.

Because you are not paying the total cost of the vehicle, the monthly payment for a vehicle that is leased will be less than that of a vehicle which is bought. However, there are several factors to consider about leasing:

1) You do not own the vehicle; therefore you cannot make any modifications or customizations to it.
2) If you get tired of the vehicle, you still have to keep it until the end of the lease term or face a large penalty.
3) You will have a set amount of miles that you can drive during the term of the lease, and if this is exceeded, you will be required to pay for each mile over the original total.

Buying a Vehicle When buying a vehicle, most individuals take out a loan to pay for the vehicle, and then make monthly payments on the loan. The loan is also based on two main charges: principal charge and a finance charge. While these charges are similar to that of the lease, they are slightly different. A principal charge is based on the total value of the vehicle, which the finance charge is the interest placed on the loan.

When you buy a vehicle, it is yours to keep as long as you make the monthly loan payments. You are free to drive as much as you want and make any customizations to the vehicle. However, there are a couple of disadvantages:

1) A monthly loan payment is always higher than a lease payment.
2) When you get tired of the vehicle, you have to sell it on your own

Before you make the decision to lease or buy a vehicle, it is important to consider the pros and cons of each option. However, in the end, the decision to lease or buy a vehicle comes down to personal preference and what you consider important when purchasing a vehicle.

Written on behalf of Total Fleet Contract Hire UK