Buying a new Jeep? Lease vs. Buy

2011 Mojave

The answer: It depends.

Leases and loans are just two different ways of financing a Jeep. One finances the purchase of the vehicle the other finances the use of the vehicle. Each side has good and bad sides. Let’s look more closely.

The decision to pick one over the other depends mainly on the priorities and abilities of the buyer. It is not possible to say that one is always better than the other. Some questions to ask yourself.

What is more important?

  • Having a new vehicle every two to four years.
  • Lower monthly payment.
  • A vehicle that is covered under warranty.
  • Higher mileage expectations.
  • Car payment-free after a few years?
  • Ability to modify and/or permanently alter the vehicle

How buying and leasing are different.

When you buy you pay for the entire vehicle and usually a finance charge. A buyer typically makes a down payment, pays taxes, and other fees. A four to six year term of regular payments then begins.

A lease is different in that you pay for only the portion of the vehicle cost. This is usually the estimated usage cost over the term of the lease contract. You pay a financial rate, security deposit, and in most states you pay for sales tax. Some leases require little or no money down.

Buy vs lease example

As an example, if you lease a $30,000 Jeep that will have, say, an estimated resale value of $23,000 after 24 months, you pay for the $7000 difference (this is called depreciation), plus finance charges, plus fees.

When you buy, you pay the entire $30,000, plus finance charges, plus fees.

This is how leasing offers significantly lower monthly payments than buying.

Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you’re driving it. In effect, you are borrowing the money that the lease company used to buy the car from the dealer. You repay part of that money in monthly payments, and repay the remainder when you either buy or return the vehicle at lease-end.

Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the full vehicle purchase price, while the finance charge is loan interest.

Since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing — it’s money you never get back, even if you sell the vehicle in the future.

The remainder of each loan principal payment goes toward equity. It’s what remains of your car’s original value at the end of the loan after depreciation has taken its toll. Equity is resale value. It’s what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have. At some point in time, after the wheels have fallen off and the engine is worn out, the only equity left is scrap value.

Continue to Part 2