Buying a new Jeep? Lease vs. Buy Part 2

Buy versus lease – where the money goes and when

Purchasing a Jeep (or any vehicle) is almost never a “good” investment. There is a difference to where your money goes and when. All vehicles depreciate in value over time some quicker than others.

Paying larger payments uses up your money quicker but builds equity in the vehicle – the term “something to show for”. This method

So, buying a car with a loan is essentially like putting money into a declining-value savings account — you never get out as much as you put in. A portion of every payment you make is lost to depreciation and finance charges. What you have “to show” for your investment when your loan is paid off is only the part that is left over after depreciation and interest. A terrible investment by any measure. But cars are not usually purchased as investments, are they?

Leasing, then, is similar to buying, but without the equity “savings account.” You only pay for what you use and you don’t put anything into “savings.” It’s true that you’ll own nothing at the end of a lease; you’ll have nothing “to show” for the money you’ve put into it. But… what you don’t own is the same part of the car’s original value — the depreciated part — that a buyer too doesn’t own at the end of his loan. Again, a car’s value depreciates the same amount whether it is leased or purchased. That money is gone forever, lease or buy.

With leasing, you may have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many experts encourage this practice as one of the benefits of leasing, though most people will typically find other uses for the money they save by leasing — such as paying the mortgage or buying groceries.

To summarize, leasing typically does not build equity, while buying does. The reason that a buyer has equity at the end of his loan is that he purchases that equity by making higher monthly payments. Leasing – lower payments, no equity. Buying – higher payments, some equity.

Leasing can be a little more complicated

Because leasing is somewhat more complicated; with residuals, money factors, etc.; it shouldn’t be undertaken quite as casually as you might with a simple loan. There are more opportunities to misunderstand and make mistakes. Therefore, leasing requires that you be more careful and more informed.

Lease to buy

Some folks lease with the intention of buying their vehicle at the end of the lease, or before the end of the lease. This is nearly always more expensive than simply buying outright. However, you may have a good reason for this tactic. Just be aware that it costs you more in the long term.

Gap coverage

Most car leases have automatic built-in gap coverage, while car purchase loans almost always do not. Gap coverage, or gap insurance, pays the difference between what you owe on your loan or lease, and what your vehicle is actually worth if your vehicle is stolen or destroyed.

Why is this important? Because it’s very common with car leases and loans, in these days of 0% interest, no down payment, and delayed payments, to owe more than your car is worth for most of the life of the financing. This can mean you’ll still owe hundreds or thousands of dollars to the finance company even after your insurance has paid off — for a car you no longer have. This turns out to be a shocking surprise for most people caught in this unfortunate situation.

So, nearly all leases have it, most purchase loans do not. You’re better protected with a lease, unless you purchase the gap insurance separately at extra cost for the loan — if you can find somewhere to buy it.

So, is it better to lease, or to buy? Every article, book, or web site about car leasing addresses this classic question.

The answer usually involves a financial comparison of the two options — typically ignoring the fact that the consumer may have interests other than overall long-term cost that can’t be factored into a simple financial analysis.

Although the authors of these writings often go into great detail, providing lease-buy calculations and the obligatory side-by-side cost analysis, the answers always come out the same — though frequently presented with a biased slant that reflects the author’s particular viewpoint about leasing.

Continue to Part 3