FRB: Vehicle Leasing: Leasing vs. Buying: Frequency of Changing Vehicles

	Glossary
Leasing vs. Buying Frequency of Changing Vehicles

Leasing	Buying
Leasing has advantages if you change vehicles frequently.	Buying has advantages if you do not change vehicles frequently.
Trade-in and warranty advantages. If you change vehicles often, leasing offers certain advantages. For example, at the end of the lease, you can turn in the vehicle, pay any fees due, and lease or purchase a different vehicle. You do not have to negotiate the vehicle's trade-in value at the end of the lease. (If you lease another vehicle, however, you will have to negotiate the terms of the new lease and pay any up-front fees due, including the first monthly payment and any security deposit.) Another advantage if you like to change vehicles often is that the shorter the lease term you choose, the greater the likelihood that the vehicle will remain under warranty during the full lease term. Unexpected depreciation advantages. In closed-end leases, you also are not responsible for depreciation of the vehicle below the residual value of the vehicle at scheduled lease-end (as stated in your lease). (However, you will pay for depreciation down to the residual value as part of your lease.) At the end of the lease term, you may have paid more or less in depreciation than the amount the vehicle actually depreciated. See the section Future Value. The residual value established in your lease may be higher than the residual value published in one of the lease residual value guidebooks. If so, your residual value probably will be higher than the actual trade-in value of your vehicle at the end of the lease. Therefore, when you change vehicles, and if the residual value stated in your lease is greater than the guidebook value, you will have paid less in depreciation than the amount the vehicle actually depreciated.	Cost advantages. If you keep your vehicle for an extended period (for example, more than 5 years), you may save money by buying your vehicle and continuing to drive it after you have finished making your monthly payments. If you finance your vehicle, you will own it outright once you have made all the payments required under your finance agreement. However, the longer you keep your vehicle, the greater the likelihood that you may incur expenses once the manufacturer�s original warranty has expired. If you trade in or sell your purchased vehicle, you will have to negotiate a trade-in or sale price, and you may incur expenses in advertising or selling the vehicle. See the section Vehicle Return. Also, you will not know the precise market value of the vehicle you own or its actual depreciation until you sell or trade it. See the section Future Value.
Tax effects. Many states impose sales or use tax only on the amount of the monthly lease payments and on any capitalized cost reduction, rather than on the full purchase price of the vehicle. In these states, you may pay less sales tax or use tax if you lease a particular vehicle and return it at lease-end than if you purchase it. Note: This advantage is eliminated if you purchase the vehicle at lease-end, because you incur sales tax on the purchase price. In most of these states, you pay the sales or use tax at the time you make your monthly payments. A few states require payment of the total at the beginning of the lease. In this case, you can choose to pay the amount up front or to capitalize the taxes and pay additional rent charge. A few states impose sales or use tax on the entire value of the vehicle and require payment at the beginning of the lease. You can choose to pay the amount up front or to capitalize the taxes and pay additional rent charge.	Tax effects. If you purchase a vehicle, you will pay sales tax on the full purchase price. This amount is due at the time of sale. In some states, if you are trading in a vehicle, your sales tax is calculated on only the trade-in difference. If you live in a state that imposes a personal property tax or similar tax on motor vehicles that is based on the value of the vehicle, these taxes will decline over the years.

Leasing

Buying

Leasing has advantages if you change vehicles frequently.

Buying has advantages if you do not change vehicles frequently.

Trade-in and warranty advantages. If you change vehicles often, leasing offers certain advantages. For example, at the end of the lease, you can turn in the vehicle, pay any fees due, and lease or purchase a different vehicle. You do not have to negotiate the vehicle's trade-in value at the end of the lease. (If you lease another vehicle, however, you will have to negotiate the terms of the new lease and pay any up-front fees due, including the first monthly payment and any security deposit.) Another advantage if you like to change vehicles often is that the shorter the lease term you choose, the greater the likelihood that the vehicle will remain under warranty during the full lease term.

Unexpected depreciation advantages. In closed-end leases, you also are not responsible for depreciation of the vehicle below the residual value of the vehicle at scheduled lease-end (as stated in your lease). (However, you will pay for depreciation down to the residual value as part of your lease.) At the end of the lease term, you may have paid more or less in depreciation than the amount the vehicle actually depreciated. See the section Future Value.

The residual value established in your lease may be higher than the residual value published in one of the lease residual value guidebooks. If so, your residual value probably will be higher than the actual trade-in value of your vehicle at the end of the lease. Therefore, when you change vehicles, and if the residual value stated in your lease is greater than the guidebook value, you will have paid less in depreciation than the amount the vehicle actually depreciated.

Cost advantages. If you keep your vehicle for an extended period (for example, more than 5 years), you may save money by buying your vehicle and continuing to drive it after you have finished making your monthly payments. If you finance your vehicle, you will own it outright once you have made all the payments required under your finance agreement. However, the longer you keep your vehicle, the greater the likelihood that you may incur expenses once the manufacturer�s original warranty has expired.

If you trade in or sell your purchased vehicle, you will have to negotiate a trade-in or sale price, and you may incur expenses in advertising or selling the vehicle. See the section Vehicle Return. Also, you will not know the precise market value of the vehicle you own or its actual depreciation until you sell or trade it. See the section Future Value.

Tax effects. Many states impose sales or use tax only on the amount of the monthly lease payments and on any capitalized cost reduction, rather than on the full purchase price of the vehicle. In these states, you may pay less sales tax or use tax if you lease a particular vehicle and return it at lease-end than if you purchase it. Note: This advantage is eliminated if you purchase the vehicle at lease-end, because you incur sales tax on the purchase price.

In most of these states, you pay the sales or use tax at the time you make your monthly payments. A few states require payment of the total at the beginning of the lease. In this case, you can choose to pay the amount up front or to capitalize the taxes and pay additional rent charge.

A few states impose sales or use tax on the entire value of the vehicle and require payment at the beginning of the lease. You can choose to pay the amount up front or to capitalize the taxes and pay additional rent charge.

Tax effects. If you purchase a vehicle, you will pay sales tax on the full purchase price. This amount is due at the time of sale. In some states, if you are trading in a vehicle, your sales tax is calculated on only the trade-in difference. If you live in a state that imposes a personal property tax or similar tax on motor vehicles that is based on the value of the vehicle, these taxes will decline over the years.

Next: Using lease-vs.-buy models

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Last update: May 5, 2003