Leasing Vs. Purchasing an Automobile



After reading the last paragraph of my reply to Sango Samuel-King Etongwe on "Njangi", a few folks called me directly, asking why I think leasing an automobile is a better option or choice than outright purchasing one. Because these fellows were very satisfied with my response, I thought it would be important to share the same information with you, for better decision making in 2014 and beyond.

     I do not know much about automobile sales in Europe, Asia or Africa, but if you live in the U.S, there are 4 ways you can acquire any vehicle or mode of transportation;

1) Leasing

2) Cash Purchase

3) Purchasing through Financing (OPM)

4) Stealing/Carjacking????

I do not recommend option #4 because you might end up in prison or getting killed. So, my discussion will focus on the first 3 options.

1) Leasing.

     When you lease an automobile or any other commodity for that matter, you are agreeing to use it for a specific interval or period of time, the duration of which is embedded in the contract. In the case of an automobile, the contract will include the monthly payments, residual value or future market value of the machine, mileage requirements, term of lease to include termination date and other conditions, etc.

    

You can also have a close ended or open ended lease, but that is another matter. However, in leasing, you will always have the following options to exercise during or at the end of the lease agreement;

a) You can purchase the vehicle at the end of the Lease period or before.

b) You can trade in the vehicle for another one.

c) You can sell the automobile to a third party and use the proceeds from the sale to pay off any balance owed.

d) You can also return the vehicle to the dealer at the end of the lease.

     Most people are only familiar with the last option, i.e. return the vehicle. Hence, they fail to take advantage of the other options available to them. This lack of information compounds the misconception the general public has about leasing.

2) Purchase.

There are two primary methods involved in "purchasing" an automobile.

a) Cash Payment.

b) Financing.

2(a) Cash Payment.

     Here is when you have decided on what vehicle make and model you want, and you do not desire having a monthly "car note" or payment. So, you use your hard earned money, to pay cash for the automobile. As soon as you make the total payment in cash or check, the vehicle becomes YOURS, because you own the Title, free and clear. And if the cash you have on hand at the time of the transaction exceeds $10,000.00, then your purchase has to be reported to IRS as a security measure against "money laundering" or what have you....

2(b) Financing or Loan.

     Here, you decide that you do not want to pay cash or cannot afford paying cash for the automobile of your choice. So, you elect to use "Other People's Money" or OPM, via the Finance option. You either borrow money from your Bank or Credit Union or any other financial institution made available to you by the dealership. You will agree to pay interest (APR) on the loan you take and that increases the cost of the automobile at the "back-end". And the cost of the loan or APR will depend of your credit rating and/or market conditions. The higher your credit score, the lower the interest rate you'll have to pay, and vice versa. Poor credit ranking means higher risk for Banks. Very bad credit rating or lower score can stop or prevent a "cash strapped person" from acquiring a decent mode of transportation. However, dealers have devised creative ways to give folks "second chances" at extremely high interest rates, e.g. "Buy Here, Pay Here" or "Owner Financing."

Question #1; So why is Leasing better than Purchase?

Answer;

A) Unlike a piece of Real Estate, an automobile is a depreciating asset. The longer you own and keep it, the lower its market value. That is not the case with a house. In proper finance management or asset allocation, you want to own an appreciating asset but, lease depreciating assets if you have to, and invest the difference in savings.

B) Leases are generally less expensive in terms of monthly payments than Financing. A good negotiation can save you between $75.00 to about $100.00 on a lease transaction. That nets to about $1000.00 annually. And although you pay "money factor" on leasing, when converted the rate is generally lower than what you would pay in APR. The reason why leasing is less expensive is primarily because you are only paying for the duration of the lease agreement, as opposed to the "life" of the automobile. It's akin to eating and paying for 2 slices of Deluxe Pizza from Mellow Mushroom, instead of paying for a whole pizza that you may not want. You only pay for what you need.

C) Your automobile is under the manufacturer's warranty during the period of the lease. The most service you'll do on the vehicle is change the oil and gas it up. Most power train warranties are 3/36 and bumper-bumper=5/60. So, if you lease a vehicle for 3 years @ 12000km/yr, then you are completely covered under warranty for the duration of the lease. That alone is an attractive feature.

D) Most leases come with ''gap insurance" as part of the package. The leasing company seeks to protect its "asset" so it ties "gap" to the deal, in the event of an accident, God forbid.

E) In purchasing, you have only 2 options to exercise, (a) sell, (b) trade. Otherwise, you're stuck with a depreciating asset, which may eventually become a liability.

F) If you owned a business, and leased the automobile in your company's name, you get to make tax deductions at the end of each fiscal year. You can deduct all your or most of your payments on the lease, but you may want to consult with your accountant to be sure about how that works.

Question #2; But I do not own the vehicle when I lease it. What happens to the money I have paid?

Answer.

    That is a normal question from people who don't understand the concept of leasing. You pay for the time you use the automobile and still reserve the right to exercise all other options available to you as aforementioned. Residual value means future market value of the product, subtracting what you've already paid. It's like putting a down payment on something to limit your "financial liability" or "obligation".

     On the other hand and for starters, when you purchase an automobile through the second option, e.g. Financing (OPM), you do NOT "own" the vehicle until the 60th or 72nd payment is made, that is if the financing is for 5 or 6 years. In a Title holding State such as Kansas, you are issued a Title with a Lien on it, and the Lien is only released after the final payment is made. In most other states, you do not get a Title, so the vehicle does not belong to you until you make the last or final payment.

     If you lived in Atlanta-Ga. for instance, where the city is spread out and you drive approximately 20,000 miles a year, then the damn machine will have more than 100,000 miles by the time you assume full ownership of the vehicle after 5 or 6 years or 60 to 72 payments. That is the age of a normal vehicle in terms of mileage. Now, what do you think your vehicle will be worth, with the meter reading 100,000 miles? Check with Kelly Blue Book. The bottom line is that nobody wants to hold onto a depreciating asset at a time when it is turning into a liability.

Question #3; If I pay Cash, then The vehicle is mine and I can do whatever I want with it. What's wrong with that?

Answer; Sounds great, but here is the problem;

     You drive that new automobile off the dealership lot, make a wrong turn and get hit. You will not receive the same amount of money you paid for it from the insurance company. You will be short by at least 3 grand. That is how fast the thing depreciates. Secondly, if you decided to sell the vehicle after 2 weeks of purchase, because something came up and you needed cash and fast, you will not get the $30,000.00 you paid for it. The most you'll get will be $20,000.00 to $25,000.00, because at that point, it is a second hand or used automobile and the value drops like lead. Automobiles are depreciating assets, and the value decreases rapidly during the first few years. Thirdly, if you did not buy extended service contract or warranty upfront, you will incur additional cost in repairs when the baby gets old and that is when the liability factor kicks in.

     For the above reasons and more, I strongly recommend the Leasing option to a majority of my clients who desire to drive new vehicles.. In most cases I recommend the purchase of "second hand" automobiles, especially Lease Returns, because they are cost effective ad well taken care of. Auto Auctions are also good places to shop for great automobile bargains.

     At this juncture, I'm available to answer any questions that our readers may have on this subject, cognizant of the fact that there are many here who may disagree with my position on "Leasing versus Purchasing". And if I do not know the right answer, I promise to find out from more knowledgeable folks in the industry. That is why forums like these are important. They offer all of us an opportunity to share our opinions on important subjects. This is a very extensive topic that cannot be exhausted in one posting. But I hope I have made my case to your satisfaction. Whenever you can, please use the information contained here and remember that an "educated or informed consumer is often a very satisfied customer or buyer."

Dr. Sam Esale is a Senior Partner with Invictus Afrika Consulting Group headquartered in Atlanta, Georgia. For your consulting businesses please, visit our website at www.invictusafrika.net  and learn more about us. Also visit www.iicfip.org  for more information about IICFIP.