You’ve got your eye on a shiny new car, but you don’t know whether you should lease or buy. This is a dilemma that many people face at some point. Do the benefits of leasing sway you, or do you only see the downsides?
The top vehicle considerations when deciding if you want to lease or buy are how many miles you’re going to put on, how much money you can afford and are willing to pay toward the car and the purpose of the vehicle.
Going beyond the vehicle, you also need to consider your personality. Does buying and owning a vehicle feel logical and correct to you? Or are you someone who thinks that paying to lease a new vehicle for less and then turning around and getting another one in a couple of years is more appealing? For many, the decision to lease or buy goes beyond the automobile; it’s all about what feels right and practical.
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What’s the Difference Between Buying and Leasing a Car?
Before deciding if you’re a buying or leasing person, it’s essential to understand the ins and outs of these two options. There are some significant and noticeable differences, but some minor considerations can mean a lot, especially regarding your finances.
Buying a vehicle means that it’s yours. If you’re financing it, there is a time when the company that is loaning you money can take it back if you do not make payments, but in other respects, it’s yours. It doesn’t matter how many miles you put on it if you get in a fender-bender, if there is a door ding or two, or if you treat it like a junk drawer on wheels. When it’s paid for, it’s yours and yours alone.
Leasing a vehicle gives you the right to drive it for a fixed period – typically three or four years. During this time, you’ll make monthly payments for the vehicle, usually less than financing the same car. This is a big plus if you want to drive a car that would be too expensive for you to purchase.
In the lease, you’ll have specific restrictions regarding the number of miles you can put on the vehicle and its condition. There might be an extra lump sum due when you return your car to cover any differences between the agreement and the final condition of the vehicle.
To sum it up in the simplest terms, car loans tend to cost more and last longer than lease payments, but you own the vehicle in the end, and in the meantime, you can treat it like you already own it. A lease is less expensive monthly, and you’re expected to comply with some restrictions regarding how you can treat the vehicle. At the end of a lease, you return the car and decide if you want to do it with another new vehicle or if you’re going to buy it this time.
Advantages of Buying a Car
It seems straightforward, but there are other things to consider – both the positive and negative sides of purchasing a car.
You’re the Vehicle Owner
This is the most significant advantage of buying a vehicle. Whether you purchase the vehicle for cash or take out a loan, it’s yours, and you can do with it what you want (as long as you pay for it).
You have an asset that can be used as a trade-in for a new vehicle, you can sell it on your own and make some money, or you can give it to your kids so they have something to drive. In the meantime, drive it all you want, adorn it with bumper stickers, and don’t worry if your kids get ketchup everywhere, or treat it like your favorite possession ever – it doesn’t matter because it’s yours.
No Mileage Limit
There’s no reason to pay attention to the miles you put on your vehicle because there’s no mileage limit and no penalties for driving a lot. This gives you the freedom to go wherever you want. If you own it, you can hit the open roads as often as possible and not worry about adding miles to your bill.
Cash Payout for Trade-in
Consider this, when you buy a vehicle, the monthly payments are higher, but a percentage of each will return to you in the end. You’re paying for the equity you’re earning on your car. Most people like this because once you’re in the vehicle game, you have a bargaining chip when buying your next car. A good trade-in can knock thousands off the purchase price of your next vehicle, allowing you to buy and own a more valuable ride.
You Can Sell
One benefit of owning a vehicle is that you can sell it yourself. This can be a financial windfall that is frequently overlooked. If you’re a good salesperson, you can often make a lot more selling a used car outright than using it as a trade-in. Then, you can turn around and put that money toward a new vehicle. It’s more hassle, but you can come out of the deal a few hundred or even a thousand ahead.
Keep the Car
Nobody says you have to get rid of your vehicle after your loan is paid off; this is a dream for many. The vehicle is yours, and all you’re paying at this point is fuel, maintenance, and insurance. A lot of car owners aim for this so they can then funnel their funds elsewhere. This is also great if you’re a parent with driving teens, give them the old car and invest in a new one for yourself.
Financing is Less Complicated
Leasing has a lot of clauses in the contract because you’re expected to return the vehicle in good condition. Financing is much easier to understand because there are fewer hoops to jump through. In general, you’re expected to have insurance on the vehicle and pay your loan on time. Nothing in the contract about the vehicle’s condition, maintaining a service record, and how many miles you drive.
Disadvantages of Buying a Car
Sales Tax (100 words)
The sales tax is one of those things that can surprise you when purchasing a vehicle, even if you’re paying cash for the whole thing. Sales taxes can add a lot to the purchase price. In some states, the sales tax on a vehicle can be significant – up to 15.12% in Louisiana. In some states, there isn’t a sales tax on vehicle purchases. But it doesn’t stop there. There might be municipal taxes on your purchase on top of the sales taxes. It’s worth investigating to see how much you’ll be paying in taxes before you’re hit with that bill.
Future Value Undetermined
Have you ever heard the adage that a new car is worth half what it was the minute you drove it off the lot? That’s an exaggeration, but there’s some truth to it because vehicles depreciate quickly. A rough estimate is that your vehicle will lose between 15% to 20% of its value each year. The problem is you don’t know how much it will lose. With a lease, the value of the vehicle at the term of the lease is predetermined, so this won’t be a surprise.
More Expensive in Short Term
If you want a new vehicle every couple of years, you’ll spend more money buying one than leasing one. When you add the payments, the upfront sales taxes and interest paid in purchasing a vehicle are more expensive than leasing. The long-term benefits make purchasing more financially beneficial, so short-term car owners may not like the numbers on a purchase.
Large Down Payment Suggested
Putting a down payment on a vehicle purchase is recommended, just like a home loan, but it might not be required. Your down payment amount will affect your loan terms, earning you a lower monthly payment and possibly a better interest rate. It can also prevent you from being “upside-down” on your loan – owing more than it’s worth. This lump sum can be daunting and might even prevent you from being able to make a purchase.
End of Warranty
Your new vehicle purchase comes with a warranty. The current standard on a new vehicle is three years or 36,000 miles, whichever comes first. When your warranty is up, unless you purchase an extended warranty, then your protection is up, and you’re on your own for repairs and servicing fees. This can add up quickly. Not only can repairs be expensive to manage without a warranty, but the vehicle’s value drops significantly if you don’t have them made.
Advantages of Leasing a Car
Lower Payments Compared to a Loan
Lease payments, in general, tend to be lower than monthly loan payments for the exact vehicle. While a loan looks at the total price of the vehicle and divides that up over the lifetime of the loan, a lease only considers the depreciation of the vehicle.
For instance, if the Model X costs $25,000 new, then buying that vehicle would spread the cost of all $25,000 over the life of the loan. If the Model X costs $25,000 new, but your lease is up in three years, and it’s still worth $15,000, then you’ll only be responsible for $10,000 in depreciation throughout the lease. This is a very oversimplified explanation, but it gives you the gist of what the base payment covers.
New Car Every Few Years
If the idea of driving a new vehicle every few years appeals to you, then a lease is probably the way. This is the most financially viable way to achieve that goal of a regular shiny new ride. When you do the numbers, purchasing a new vehicle every three years is considerably more expensive than leasing it – even when you figure out the value of the owned vehicle.
Not only do you get a new vehicle, but if you’re an early adopter, it’s the bells and whistles of that vehicle that will make you smile. Technology changes quickly today, especially in cars. If you’re trading in for a new model every three years, you’re staying on top of tech and getting some luxe trends before many other people.
Trade-in Process
At the end of the lease term, you have three options: you can purchase that vehicle, find a new vehicle to lease, or end the contract and walk away. These options are relatively easy to manage, especially if you’re trading the vehicle for another lease or ending the contract. The terms were predefined in the contract, so the dealership has to check to see if you’ve maintained your end of the deal and assess any overages, if necessary.
Cost Savings
There are several ways a lease can create cost savings for you. The first cost savings is the biggest. You’re only paying for the depreciation on the vehicle, not the entire expense. This will be the most significant savings reflection when comparing the monthly cost of buying a car versus leasing the same car.
The down payment is also a significant area of savings because most leases don’t require one. If you don’t have a big chunk of money earmarked for a vehicle down payment, then leasing is the way to go.
Taxes also increase with a purchase, where they’re minimized on a lease. In the purchase, you’ll be taxed on the entire cost of the vehicle, which will be spread out over the loan’s lifetime. With a vehicle lease, you’re taxed for the depreciation, which is a much smaller amount of money, so the taxes are less.
Also, a smaller amount to consider, but it still adds up – maintenance fees. Most leases include routine maintenance, such as oil changes and tire rotation.
Disadvantages of Leasing a Car
You’re Not the Vehicle Owner
If being the owner of your vehicle is essential to you, then this will be the most significant drawback to a lease. You’re basically borrowing and paying for that privilege when you’re leasing. You’re expected to keep the car in good working order and good condition aesthetically. If the vehicle isn’t in the condition the lease contract specified, you might have to pay additional fees.
Mileage Limit
The most common mileage limit for leased vehicles is 10,000 miles per year. You can get a lease that allows for more miles but will cost more. If you go over the mileage allowed, there is a fee at the end of your lease that can be pretty large. 10,000 miles might seem like a lot, but the U.S. Department of Transportation Federal Highway Administration has done the math and the average number of miles an individual drives a year is 13,476. That’s well over the allowed mileage for most leases. It can be much worse if you’re male because your average miles driven is 16,550.
Leasing is Complicated
You will quickly understand the financing contract if you compare financing and leasing. Leasing is complicated and varies from dealership to state and state to state. Not only that, but the little details – especially regarding how you return the vehicle – are crucial. If you’re new to leasing, it takes some effort to understand what is involved and what questions to ask, so you know what’s expected.
Cost Surprises
There are some expenses involved in leasing that might come as a surprise. Some could be shocking if you weren’t expecting them at all. It’s best to have the salesperson or the leasing agent detail all of the potential expenses you may encounter that go above and beyond the monthly lease price, but you should be aware of:
- Excise taxes
- Overage fees
- Damage fees
- Registration fees
- Sales taxes
- An acquisition charge
Must Keep Car in Good Shape
To avoid some extra fees, one of the things you’ll be responsible for is keeping your vehicle in good condition. This has different meanings for different leases, so you must understand your expectations. You might be a neat freak, so that doesn’t worry you – but it’s important to know it’s not all under your control. If someone hits your vehicle with a shopping cart, you might be responsible for that damage.
Another expectation is that you will do routine maintenance when it’s required. Many leases will pay for it, so that’s not the issue. It’s finding time to get an appointment that fits the lease’s timeframe and using their recommended facilities.
Use Restrictions
This is one of those little facts most people don’t consider, but it can be a game-changer. If you own a vehicle, you can let anyone drive it. When you lease a vehicle, the lease often specifies who’s allowed to drive, and it’s usually restricted to immediate family and spouses or live-ins.
If you’re aware of this clause at the outset, you might be able to specify people who usually drive your vehicles, like a babysitter or a personal assistant. It gets tricky if an unauthorized driver gets into an accident with your leased vehicle because their auto insurance and auto insurance policies come into play and can be messy.
Gap Insurance Required
Your lease might require guaranteed Asset Protection (GAP) insurance; if it isn’t, you’ll probably want it anyway. GAP insurance steps in if your vehicle is stolen totaled, or seriously damaged in an accident.
GAP insurance pays the difference between the vehicle’s worth at the time of loss and any remaining financing still owed on the lease. This is important because your lease term doesn’t end if the vehicle is totaled. You’re still expected to pay for the entire contract term.
Whether this type of insurance is required in your lease agreement or not, there are two types of GAP insurance to investigate so you’re protected and have peace of mind:
- Finance/Contract GAP Insurance
- Vehicle Replacement GAP Insurance
Who Should Consider Buying a Car?
Practically speaking, buying a car is a financially wise move if you’re going to keep the car for more than a few years. At that point, the cost of purchasing the car begins to pay off, and you will have the car’s remaining value in the future.
Moving beyond money, if owning your car and having the freedom to use it any way you want, let it get dirty, skip an oil change or do maintenance on your terms, and travel as many miles as you want, then, by all means, forget about the lease and go right to the loan office.
Another thing to consider is buying a vehicle that’s easier to afford, like a used or certified used vehicle. This gives you lower payments and all the benefits of owning it while lowering the monthly payments so you can focus your finances elsewhere. It is possible to lease some used vehicles, but you have a much larger pool to choose from if you’re open to buying a used vehicle.
If you love owning a new car, especially a luxury model loaded with new technology, then leasing is probably the best option. Leasing lets you have a new vehicle every few years with all of the recent bells and whistles in the most cost-effective way. The lower monthly bill means you can get a higher-end model, and by swapping out regularly, you’ve always got new wheels loaded with new tech.
Leasing might also be a good option if you can’t afford a car loan and don’t have any down payment. This may have you in a lower-end model, but at least you’re driving a new car and have the peace of mind of a warranty behind it. This can also be a foot in the door if you want to purchase the vehicle at the end of the lease but need a few years to save up to pay it off.
When it comes down to it, buying or leasing has more to do with what you want in the long run. Do you want to own the vehicle you’re paying for each month, or would you rather pay to use it and then move on without ties?