Lease vs. Buying/Purchase Comparison

Friday, October 21, 2016

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Use of a product (motor vehicle, real estate, etc) for a fixed period of time at a stated payment with no form of ownership included. A simple definition: "A NON-EQUITY PURCHASE!"

Exchange of money {and/or credit agreement} for a product! {taxes, licenses, maintenance, and possible finance charges will increase the TOTAL purchase cost!}

WHICH IS BETTER? The answer depends on many are a few!

Leasing currently accounts for about 34% of the vehicle market. The total has been fairly constant over the last 25 years. To determine which may be better, let's examine recent nationwide consumer polls and list the top seven reasons for selecting one over the other.

1) Paying cash. Didn't want payments. Wanted nice vehicle & low payments
2) Unsure about leasing? Not comfortable with process, heard negative things. Easier to get a new vehicle every two to four years, saving maintenance costs.
3) Credit qualification problems. Don't like selling my vehicles later.
4) Never thought about it and never inquired about leasing. Liked additional insurance coverage using leasing company umbrella policy.
5) Planned to keep vehicle a long time. Lower taxes and finance charges.
6) Insurance limit/history problems. Accountant recommended leasing.
7) Estate ownership questions. Wanted to try vehicle before owning.

Many other answers were given but those listed above represent the bulk of the responses. Examination of these statements and a few other interesting comments will provide good insight into the following question:


FACT #1: Paying cash is the cheapest way to acquire a vehicle {unless you invest your cash earning high returns in lieu of spending it for a depreciating asset!} Finance charges ADD to your cost. They are usually regulated by state law {including tax & license rates} so purchase costs vary widely, depending on location. Leasing, regulated mostly by U.S. Federal Law, is not designed to provide ownership equity and costs can also vary by location and seller. REMEMBER...when you purchase, you don't OWN the vehicle UNTIL you have fully paid for it.

FACT #2: Leasing is usually an advantage for consumers {LESSEE} who plan to keep a vehicle for shorter time periods {48 months or less}. Consumers keeping a vehicle over a long period of time are usually better off with a purchase. Most experts agree with this view, but some don't think it relevant. The primary reason a time period is important is because a vehicle depreciates rapidly in early years of use then slower in later years and, maintenance aside, your vehicle loses less value over long time periods, lowering the actual cost per year. The catch here is the usually overlooked statement, "maintenance aside"! You cannot predict what future upkeep expenses will total, so your purchase cost MAY expand greatly. A short term lease can remove that problem most of the time.

FACT #3: Leasing is complicated, mysterious and confusing to SOME consumers so let's clear up the confusion and mystery! When you buy something you always know the "purchase price", but for years many leases did not disclose the "capitalized cost" {a fancy name for vehicle purchase price in a lease} or they made it very hard to find in the legal wording of a lease. U.S. Federal Laws have now done a good job standardizing leasing forms and it is now easy to know the "Capitalized Cost". You should NEVER enter into a lease unless the form shows this cost and complies with all Federal laws.

Leases come in two basic types; CLOSED {aka Net Lease} and OPEN {aka Finance Lease}. The OPEN or CLOSED term refers to who is responsible for the vehicle value at the end of the lease and because it could affect your future obligations it is very important to understand each type clearly. Remember the earlier lease definition "A NON-EQUITY PURCHASE"? The end of term value is what is called "equity" on a purchase. In a lease you NEVER pay this amount {unless you wish to purchase at lease end}! See Fact#4 for further information. When lease payments are computed, the first step determines the vehicle value at lease END, usually called "residual" or "termination value". This amount is then subtracted from the "Capitalized Cost" to determine the amount the vehicle will depreciate over the lease term selected. This vehicle value loss, called "Total Depreciation", is now divided by the number of lease payments desired, resulting in the "Monthly Depreciation". A monthly "handling fee" is now added to cover the lease company interest expense {you don't receive something for nothing} to derive the final lease payment. Federal law doesn't require interest rates be listed in a lease, primarily because of the complexity in the computation methods and the inability to put it in a format the lessee would understand. The leasing business is now so competitive it is not something you need to worry about and you usually can't control it anyway. If you're not happy with the final lease payment then forget the lease!

FACT #4: Pride of ownership is important to many consumers, others just want to drive a vehicle till it falls apart! If you purchase a vehicle, exactly what will it be worth when you plan to sell it? CAN YOU PREDICT THE FUTURE ACCURATELY? NO! AND NEITHER CAN THE LEASE COMPANY! Risk is involved when fixing a future value on a vehicle. A CLOSED lease means the leasing company takes risk and the consumer has no obligation if the estimated value is wrong. got it, the consumer is liable. If a $25,000 vehicle drops $4,000 in a year, will it be worth $13,000 in three years? Unfortunately no one knows for sure. When you purchase, you are the one who must eventually find a buyer for your used vehicle. That will take time, money to advertise it, and possible danger with unknown persons visiting you to see the vehicle and there is a potential loss by getting less than you planned. This it the biggest advantage to leasing. SOMEONE did gamble on that value and it wasn't YOU! If future value were guaranteed, a purchase would be a sure thing because exact total cost over time would be known. This not being possible, the next best thing is a CLOSED lease, with an OPTION TO BUY AT LEASE END. Yes...this does exist, BUT NOT ALL LEASE COMPANIES PERMIT THIS. They assume the downside risk when you lease so THEY want the possible upside profit if the value of the car is higher at lease end. Terms can vary with a repurchase but, if permitted, the buyback price MUST be disclosed in the original lease documents. Read the terms carefully. A good CLOSED lease with acceptable buy back terms is better than a purchase....when you want to fix expenses as close as possible in advance.

FACT #5: Because a lease is NOT designed to build equity and should not require a down payment at origination, lease lenders are not happy allowing persons with marginal or poor credit histories to enter a lease. This restriction prohibits many consumers from leasing. Missing or late payments during a lease, resulting in repossessions, will cause a greater loss to lenders than a purchase because no "equity" was building. Without this equity flow, lease payments are usually 35% to 40% lower than a purchase. Those higher purchase payments and down payment are what usually form your equity when you are done paying off a purchase. You really only get back what you paid out {you hope?}. Some lease programs require Security Deposits. Marginal credit risks usually require a higher monthly payments or additional money, on delivery, used to lower the payments, called "Capitalized Cost Reduction". It is always better to avoid a "Cap Reduction", unless you are required to put up extra money, because most states collect sales tax on that amount immediately, losing some of the advantages of a lease.

FACT #6: There is NO big tax advantage to leasing! Legitimate business usage can be deducted on a purchase or a lease. A purchase is a little more complicated to deduct with current tax laws and usually requires accountant assistance to do it properly. Leasing ONLY offers a simpler way to do your taxes and mileage limits are sometimes easier to work with in a lease, and in SOME cases can be a bargain. A vehicle will depreciate with higher mileage {over 15,000 annual miles}. Drivers who put on high miles are usually better with a lease but you MUST shop for the best deal. If you do not want to sell a high mileage vehicle later on, then leasing is for you!

FACT #7: During the past few years consumers have become aware of SOME insurance advantage in leasing. Lenders must carry huge liability "umbrella" policies and they require a lessee to provide base limits of $100,000. When you purchase you can carry whatever minimum insurance your state allows. If you are at fault during an accident, especially when an injury has been sustained, your minimum coverage could cause you "BIG" problems. Check with your lease agent for a full explanation of the advantage here. While you are at it....make sure your lease has "GAP" protection, usually included with most major lease companies. This type of coverage will permit no loss to you in the event your vehicle is stolen and not recovered or was "totaled" out in an accident.


1) - Don't plan on walking away from your purchase or lease early. You have the right but you may be required to make a negative payment to terminate prior to your contract going full term. Don't sign a contract for a period of time longer than you intend to keep the vehicle. Many salespeople can mislead customers, especially in leasing, by leading them to believe they can return a year or so later and get a new vehicle. POSSIBLE, but will probably cost a lot of money! A lease agent can take a negative from one lease and tack it on a new lease, advisable ONLY if you just can't stand you current vehicle.

2) - If you lease or purchase, take care of the vehicle! It will be worth more if you treat it properly. Remember....if you purchase, it's not yours until you have fully paid for it. If leased, you can be charged for abusing a vehicle OR for driving excessive mileage over the original agreed amount. Be honest at the lease start and figure out how many miles you plan to drive and let the leasing company put you in a proper lease! Your lease terms will cover both of these items in detail so READ CAREFULLY.

3) - If you wonder how leasing companies can take on the risk they do and why they are in the business with such great are some reasons and important facts:

a) Certain tax advantages accrue to lending institutions when they write a lease, but NOT when a vehicle is purchased.
b) Manufacturer leasing plans {i.e. GM, Ford, etc} love leasing because they can move more product over a shorter time period and they usually tend to be very liberal with the "residual" values on short term leases, mostly because they have a dealer network to help dispose of vehicles at lease end. They also occasionally provide "subsidized" rates to those dealers which result in lower payments for a lease. This helps build the brand loyalty and creates high customer renewals.
c) Banks and other lending agencies look for a good yield on their loans and leasing provides lower risk to their portfolios, allowing higher profits. Bank rates {your handling charge} are generally lower on longer leases.

4) - Pick your purchase or lease source carefully. Deal with experts. Ask friends and/or co-workers who could refer you to someone with whom they may be comfortable. Shop around to find the vehicle you like and the dealer you are happy with! Shopping over the internet is now very popular and can save time in the selection process, but a lot of things can happen when you are not "on scene" looking at the vehicle you may want to purchase or lease. Remember, both buying and leasing offer the consumer good options when properly structured. Understand WHAT you are signing BEFORE you sign! Most of the consumer unhappiness is caused by misunderstandings not cleared up BEFORE purchase or lease! Don't be pressured and ask a lot of questions until everything is clear in your mind. You should now be a very informed "shopper". GOOD LUCK.

Written by:
Gary C. Worthington, Account Executive
Crevier Sales & Leasing Inc., 1500 Auto Mall, Santa Ana, CA 92705
Phone: 714-972-1270 ext. 2454 or 714-357-4119.