Should I Lease or Buy a Car

New car sales are flying again recently– but is buying really the best way to go? Keep reading as we crunch the numbers and help you to decide when asking yourself the question “should I lease or buy a car?”

On average there are over 400,000 new cars sold each month, so buying a new car is big business.

Renting the vehicle for two or three years then handing it back, otherwise known as personal leasing, is becoming increasingly popular. In the U.S., where it was initially established, it accounts for one in four vehicles in private use. And there are other ways to finance your wheels, as explained here.

If you’re set on buying, pay the right price

The cost of a new car, even where the model and spec is identical, can vary widely. Use the resources available at your figure tips and shop around. Make sure to go to market at multiple dealerships with the best quote, specifying the exact model required and that you are a cash buyer, this puts you in a strong position and you should get a response with a better quote. From there you can send out the same email again with the revised quote and see if you get any traction. You can do this until the quotes don’t get any lower but you will likely get the best quote on round one.

If you’re leasing, keep an eye on depreciation

The leasing principle is that you cover the cost of the vehicle depreciation plus the profit of the lease operator, thus covering the vehicles fall in value during that period.

This is the reason it is why it’s surprisingly cheap to lease high end models such as Range Rover or Audi or special editions of other vehicles that better hold their “residual” value. Fuel efficiency and tax also impact on the cost effective nature of leasing. When tax or fuel goes increases, gas guzzlers depreciate faster.

Mileage is one major factor which can depreciate the value of a car. This is why strict mileage conditions (usually around 10,000 miles per year) tend to be imposed within the contract of a car lease agreement. A car with high mileage on the clock devalues at a much faster rate. As such there can be strict penalties for going over the agreed limit so be realistic when negotiating your deal.

Leasing is ideal for those wanting a brand new car every few years – but not if they are going to rack up serious mileage.

Doing the sums: how leasing compares with buying

Normally an upfront sum is required for leasing, calculated as a multiple of the monthly payments. There is usually the option to pay a higher upfront fee in order to reduce the monthly payments should you wish to do so, and vise versa.

Let’s look a real life example, 24-month personal-use lease on a diesel automatic four-door Mercedes C-Class Sport Saloon. Your down payment would be £2,293.20, which is nine times the following 23 months’ payments of £254.80. In this particular deal there is an arrangement fee of £230 and an annual limit of 10,000 miles. After 24 months, the cost of this car is £8,383.60 excluding insurance, fuel etc.

Now let’s compare with buying that same car outright.

The brochure price is slightly under £33,000 and What Car? gives a target price of £28,700. The AA puts depreciation across all makes at 20% per year on average – however in the first year the value drops between 10 and 40% so the average is better taken over a long period. Factoring in a depreciation of 20% from the target price, this Mercedes would have cost £11,480 after two years should you have bought it outright.

Other financial arrangements explained

You will have to lend money in some form if you don’t opt for the cash or lease option. The majority of dealerships will also offer hire-purchase (HP) arrangements where you own the vehicle after an agreed term of monthly payments. On a monthly basis, HP comes out at double or even triple the cost of leasing. With HP, the depreciation and the interest rate are crucial factors.

The most complex borrowing options are personal contract purchase (PCP) schemes, which are a combination of HP and leasing. With PCP you pay a lower upfront fee with smaller monthly payments, at the end of the agreement you have a couple of options. You have the option for the vehicle to become your property by paying a final “balloon” payment. The second option is to take a new agreement out on a better car with the same dealer or finance provider, alternatively you can return the car and make no further payments. PCP is more cost effective than HP but tends to cost more than leasing. Dealers encourage PCPs over other finance arrangements as, in practice, drivers stay and upgrade and thus they become a long term customer. However, the value of PCP is difficult to assess for the driver due to the number of factors involved.

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