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Differences between buying and leasing a car

mp3 #301 Should I lease or buy a new car? (mp3 file)

More and more people are leasing new cars, instead of buying them. In the United States in 1981, about half of the leased cars were leased by individuals. The other half were leased by corporations and other businesses. In California in 1981, about one out of every four new cars was leased.

Companies and other businesses have leased new cars for many years, because they are able to write off most or all of the cost of the lease for tax purposes. Individuals who lease new cars do not have the same tax advantage as corporations, however, so why are more and more individuals now leasing new cars?

Leasing new cars has become more socially acceptable among younger consumers in recent years, and increasingly higher prices for new cars have also contributed to the popularity of leasing. If you lease a new car, your down payment and monthly payment are usually lower, as compared to buying a new car. In order to determine the comparative costs, it is necessary to compare the following: down payments, individual monthly payments, and total payments over the period of the lease compared to those for a conventional car loan.

If you lease your car, the catch is that at the end of the lease term you do not own your car, while if you buy your car, you will own your car when all of the loan payments have been made. After three years, the average car is worth about half of its original price. Any saving by leasing the car must be deducted from the residual value of the car after the lease term expires. You may find that the total payments are less if you lease, but that after the deduction, it will cost you more to have leased than to buy on the installment plan.

The new car leasing industry points out the advantages of new car leasing, as compared to buying. The advantages are:

1. Lower down payment,

2. Lower monthly payments,

3. Money, which otherwise would be required for a down payment and higher monthly payments, may be invested instead,

4. Sales Tax is less, because it is calculated on the monthly lease payment, instead of on the total sales price,

5. At the end of the lease period, you do not have to worry about selling or trading in your car, because you do not own the car.

The Consumer Protection Division of the California State Attorney General's Office, however, warns of some of the drawbacks of leasing a new car:

1. Your lease contract may fail to spell out the possible penalties, or it may put them in the fine print of your contract,

2. There is usually a stiff penalty for returning the car early, before your lease period runs out at the end of 36, 42, or 48 months,

3. You may have to make a balloon payment at the end of your lease, if your car's resale value falls short of what the leasing company had estimated it would be when you entered into the lease agreement. The open-end lease is the most widely used lease in California, and this type of lease makes you responsible for your leased car's actual depreciation. For example, if your car is worth less than half at the end of your three year lease, and the leasing company estimated that it would be worth one half of the original cost, you would have to make up the difference. However, California law limits your liability to a balloon payment of no more than the equivalent of three monthly lease payments. This protection applies, however, only if you drive your leased car exclusively for your personal use. If you use your leased car for business purposes, the state law limiting balloon payments no longer applies. A leasing company may overestimate your car's resale value, in order to reduce your monthly payments, and then charge you for the difference when you turn in your car.

4. Another drawback of leasing is that if you end up driving your leased car for more miles than you originally estimated in your lease agreement, you might be charged for each mile over your estimate.

5. Some lease agreements require additional fees, if the car's wear and tear at the end of the lease period is considered excessive by the leasing company.

Industry officials advise that if your family income is less than $25,000.00 a year, you should avoid leasing a new car. If you can't afford to buy the car, you probably can't afford to lease it, either, because leasing may cost you more in the long run. The interest rate on a lease is usually higher than the interest rate on a conventional car loan, and your credit record must usually be better to qualify for leasing, as compared to buying. More car insurance is also usually required if you are leasing.

If you decide that leasing is for you, be sure to shop around and haggle over the price, just as you would if you were buying a car. Ask how depreciation on the car is figured, and how much is the monthly service fee charged by the leasing company. Before you sign a leasing contract, take it home and read it, including all the fine print.

Where do you lease a car? There are independent leasing companies which offer a wide selection of cars and financing plans, because they are not tied in with anyone car maker or lender. In addition, you may lease a car from a car dealer, a car rental company, or from a bank.

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