Lease or Buy - What are my options?

spaceThe average American trades cars every three to four years. It's a common dilemma: to lease a car or buy a car - which is better? Everyone who has ever considered leasing has had this question cross their mind. After all, our parents always purchased a car; isn't that what we are supposed to do as well? The answer is - it depends. It's not possible to simply say that one is always better than the other because the answer depends on the specifics of each individual situation.

Simply put, leases and purchase loans are two different methods of automobile financing. A lease finances the use of a vehicle; the other finances the purchase of a vehicle.

At Peoria Subaru, our goal is to help you find the car you want at the price you can afford. This page of our website is designed to educate you on the differences between a lease and a purchase and give you to questions to ask yourself, and us, about the benefits and drawbacks of each. Each has its own benefits and drawbacks and we'll try to simplify it and separate fact from fiction. When making a 'lease or buy' decision you must look not only at financial comparisons but also at your own personal priorities - what's important to you?

Please use the Table of Contents below to focus in on specific topics.

Questions to ask
Is having a new vehicle every three or four years with no major repair risks more important than long-term cost? Or are long term cost savings more important than lower monthly payments? Is having some ownership in your vehicle more important than low up-front costs and no down payment? Is it important to you to pay off your vehicle and be debt-free for a while, even if it means higher monthly payments for the first few years and higher maintenance costs in the car's older years?

So we find out that making a lease-or-buy decision is not quite cut and dry. There are some things you need to consider. Let's take a look at some of these things now.

Buying and leasing are different
When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the vehicle for its depreciated resale value. In reality, at the end of the typical five-six year loan period you may well own the car, but chances are you really wanted to trade it in a year ago or earlier. Since this is a depreciating asset, it loses value over time with some makes and models depreciating faster than others. So, the car you now own and don't really want and isn't worth very much when you try to trade it in. However, pride of ownership is important to many consumers; others just want to drive a vehicle till it falls apart!

When you lease, you pay only a portion of a vehicle's cost, which is the part that you "use up" during the time you're driving it. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most states), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay bank fees that you don't pay when you buy. Note that Subaru does not require a security deposit. You make your first payment at the time you sign your contract - for the month ahead. At lease-end, you have three options regarding the disposition of the car:

1. Keep the car because you are in love with it. You pay based on the guaranteed future value (GFV) established when you originally leased the car.
2. Sell or trade the car. If the value of the car is actually HIGHER than the GFV, you can sell it or trade it and keep the equity (profit) in your pocket.
3. Walk away with no negative equity. Why keep a car that has a value lower than the GFV. At that point you can lease or purchase another vehicle.

Buy vs lease example
As an example, if you lease a $25,000 car with a residual value of 50% or $12,500 after 36 months, you only pay for the $12,500 difference (this is called depreciation), plus finance charges, plus possible fees. For those customers that live in VT or MA, you only pay taxes based on the part you use (typically added to each month's car payment), not the entire amount of the vehicle.

When you buy, you pay the entire $25,000, plus finance charges, plus possible fees plus the entire sales tax amount up front.(assuming no trade). In MA, that $1,562 of taxes is to be paid UP FRONT. In VT, it's $1,500.

This is fundamentally why leasing offers significantly lower monthly payments than buying.

Some folks lease with the intention of buying their vehicle at the end of the lease, or before the end of the lease. Leasing a vehicle with the intent of buying it at the end of the lease is almost ALWAYS more expensive than purchasing the vehicle over the longest possible term (72 months). This is because the residual value at the end of the lease that was determined when you leased the vehicle is almost always higher than the actual value of the car, and that's to your benefit. Higher residual value = lower payments.

To summarize, leasing typically does not build ownership 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. Part of each payment funds the equity. Leasing = lower payments, no equity. Buying = higher payments, partial (and declining) equity.

Mileage matters
Subaru leases are typically 10,000, 12,000, or 15,000 miles per year but can be customized up to 30,000 miles to meet your particular needs. If you have a predictable lifestyle and driving habits where you can "guesstimate" that your annual mileage will fall within these parameters, then leasing is a viable option. However, if you exceed the allowed miles at the end of a lease, expect to pay .15 per mile overage fee. This is why it is important to know how many miles you expect to drive a year.

Early Termination
If you want an early termination of your purchased vehicle, you would have to either sell it privately or trade it in. This often results in negative equity (owing more than the value of the car).

If you want out of a lease early, you may be stuck. However, several fee-based Web sites, including and Swapalease, match people who want to get out of a lease early with those who want to assume a short-term lease. At you pay a small fee of $90 to post your vehicle and $150 to complete the transfer of the lease.

GAP coverage
Subaru 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 in an accident. Why is gap insurance important? Because it's very common, in these days of long-term loans and leases, rolled-over and refinanced loans, and little or no down payment, to be "upside down" - to owe more on your loan or lease than your car is actually worth. This can mean you'll still owe hundreds or thousands of dollars to the finance company even after your insurance has paid for your car that has been totaled or stolen. This turns out to be a huge shocking surprise for most people caught in this unfortunate situation. So, Subaru leases have built-in gap protection, but loans do not. You're better protected with a lease, unless you purchase the gap insurance separately at extra cost for the loan. Peoria Subaru offers GAP insurance on all purchase plans.

So, which is better, lease or buy?
So, is it better to lease, or to buy? As with any question of this type, there are always pros and cons, pluses and minuses, advantages and disadvantages.

YOU SHOULD LEASE - If you enjoy driving a new car every three or four years, want lower monthly payments, like having a car that has the latest safety features, newest technology, best MPG, is always under warranty, don't like trading and selling used cars, don't care about building ownership equity, have a stable predictable lifestyle, drive an average number of miles, properly maintain your cars, are willing to pay more over the long haul to get these benefits, and understand how leasing works, then you should lease.

YOU SHOULD BUY - If you don't mind higher monthly payments, prefer to build up some trade-in or resale value (equity), like the idea of having ownership of your car, prefer paying off your loan and being payment-free for a while, don't mind the unexpected cost of repairs after warranty has expired, drive more than average miles, prefer to drive your cars for years to spread out the cost, like to customize your cars, expect lifestyle changes in the near future, and don't like the risk of possible lease-end charges - then you should buy.

If you are a two car family where at least one car does not exceed 15,000 miles per year, a clear option would be to lease at least one of your vehicles. Purchasing a car can be more risky than leasing. We all know how much cars depreciate. The best option is the one where you put down the least amount of money. The less out of your pocket, the less you have to lose. Please ask your Peoria Subaru Product Specialist or Finance Manager to show you BOTH lease and finance payments so you can make an informed decision.