July 25, 2014 at 9:57 AM ET
Late summer can be a good time to buy a new car because the next model year will soon be hitting the dealer lots and prices are often lowered to make room for the new vehicles. Prices traditionally peak in April and subsequently fall by July, according to Black Book's valuation data on popular car segments.
Though lease deals are not as seasonal as car financing offers, more than a quarter of vehicles that are driven off dealer lots today are sold through lease programs, according to the car shopping website Edmunds.com. Leasing may be the right option for some, but others may not qualify because of credit, income or other requirements. Since buying a vehicle is often the second-largest purchase a consumer makes after buying a home, it's important for consumers know what they're getting.
Here are three key questions to answer before deciding whether it makes sense to lease or buy:
How long do you plan to drive the car?
Determine up front how long you want to drive the same vehicle. The average American car is 11 years old, but most drivers will own a car—and finance that ownership—over a shorter period of time.
"The average length of ownership is around 65 months, which means most people don't even have the same car once that 72-month loan matures," said Scot Hall, executive vice president of the online marketplace SwapaLease.com. "In leasing you can change your vehicle more frequently and update your technology over a shorter time period and the vehicle remains under warranty during the lease contract." The biggest incentive for many people who decide to lease is that you can drive a brand new, higher-priced and better-equipped vehicle than you might otherwise be able to afford to buy.
How many miles will you be driving on average?
What gets most people at the end of the lease is this: If you drive more than the designated miles in your lease agreement, you will incur a penalty, which generally ranges between 15 to 25 cents per mile. It doesn't seem like a lot but it can add up!
How much can you afford to spend on the car?
Remember to calculate the total cost. When you lease, you pay only a portion of a vehicle's total value, which is the part of the value that you "use up" during the time you're driving it and this translates into lower monthly payments than buying a vehicle. You have a choice of not making a down-payment— a lot of lease offers spread the down-payment across the life of the lease. You also pay sales tax only on your monthly payments in most states. And if you are self-employed, you may be able to write off the lease as a business expense deduction come tax time.
But there can be significant financial advantages to buying. If you purchase the car in cash or once you pay off the loan, you'll be free from making payments. It's your car and you can drive it as often and as much as you'd like without worrying about penalties and mileage limits. Insurance premiums are also typically lower than leasing.
If your monthly budget is tight, and you take out a car loan, buying a car may not work out for you. Monthly payments are generally higher for a loan than for a lease. You typically make a down payment of 10 to 20 percent, pay sales tax on the full purchase price and pay an interest rate determined by your loan company, based on your credit score. Also consider the rapid depreciation of the value of the car as well as repair bills over the years.
Calculators at Edmunds.com, KBB.com and ConsumerReports.org can help you figure out what your monthly payments would be and the total net cost. These websites can also help you compare prices on cars, while Wantalease.com and Swapalease.com can help with finding deals on new leases.
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