Buying vs. Leasing
|How this Guide is Organized|
|1. Benefits of Leasing|
|2. Benefits of Buying|
|3. Drawbacks of Leasing|
|4. Drawbacks of Buying|
Before you decide which car you’re going to buy, you have to find a way to pay for it. Few buyers can pay cash for a car, so most shoppers either finance or lease the car. There are different factors to consider when choosing which finance method is best for your budget and lifestyle. We run down the benefits and drawbacks of buying and leasing a car.
When leasing, many shoppers are able to get into a higher-priced car they might not be able to afford if they took a car loan out on it. The car’s monthly payments are cheaper because you’re only paying for the future depreciation of that vehicle, and not the total amount. For example, on a $25,000 car, you’d finance the entire $25,000 purchase price with a car loan. With a car lease, you only pay a percentage of that. The residual value is based on the car’s predicted future value, and is what the car is expected to be worth at the end of the lease. The residual value is subtracted from the purchase price and what’s leftover is what you make payments on.
If a low monthly payment is best for your budget, consider leasing. Since you’re only paying for a portion of the car when you lease, payments are typically less than when you have a car loan. If you only have a small down payment saved up, leasing may also be better for you. Many leases require anywhere from $0 to several thousand dollars up front, though the down payment is negotiable. Many advertised lease offers will promote low payments, but require a sizeable down payment. If you want to put as little down as possible, remember that your monthly payments will be higher.
Another benefit of leasing a car is that you don’t have to worry about expensive repairs. Many leases last about three years, which is typically the length of many new-car bumper-to-bumper warranties. Many times, the car is covered under warranty for repairs for the duration of the lease. You still need to maintain the car, though, which includes oil changes, tire rotations and recommended maintenance from the manufacturer. Failure to properly maintain the car during the lease can result in fees when you turn the car in.
If you enjoy having the latest and greatest in new-car technology and safety features, leasing could be right for you. If you like the car so much that you want to keep it, you can generally buy it at the end of the lease. But many shoppers simply turn it in and lease another new car when their lease ends. This allows them to have a new car every few years.
As mentioned above, shoppers who want a new ride every few years will probably like leasing. If you want to keep your vehicle as long as possible, buying is probably better for you. When you buy, you own the car once the loan is paid off. Until the loan is paid off, the lender owns the vehicle.
Some auto loans specify that you cannot alter the vehicle in any way until the loan is paid off. Once you have the title to the car, you can do whatever you want with it, like change the paint color, add bumper stickers, add a new audio system, alter the suspension or upgrade the wheels and tires. With leasing, you can sometimes make minor alterations to the vehicle that can be reversed before you turn the car back in, like tint the windows, but you generally can’t make any major alterations. Make sure you read the loan or lease contract carefully before signing.
One of the biggest benefits that buying has over leasing is that there are no mileage restrictions. Lease contracts will state the number of miles you can drive per year and in total, and if you go over that amount, there’s a fee per mile assessed when you turn the car in. If you have a long commute or do a lot of driving in general, buying is probably better for you.
Automotive lease contracts limit the number of miles you can drive. These mileage restrictions typically are 9,000, 12,000 and 15,000 miles a year. You need to estimate how many miles you drive per year so you can determine how many miles to purchase. If you go over, you’ll pay a fee per mile at the end of the lease when you turn the car in. These overage charges can be very expensive.
Another drawback is that when you lease, you’re really just renting the car for a few years and paying interest to finance that car over a specified period of time. The lessor (lender who owns the car and is leasing it to you) earns money off the interest you’re paying and dealers sell cars coming off lease as used cars or certified pre-owned cars at the end of the lease. Because leased cars have strict rules about mileage and maintenance, they’re turned in in pretty good condition. Unfortunately, you don’t get anything for all the hard work you put in to the car to maintain it and keep its mileage low. Since you’re basically renting the car, you’re not building any equity. This is similar to renting an apartment versus buying a condo or house.
When you buy a new car, you roll the dice a bit with its resale value. It’s hard to determine what the vehicle will be worth when you’re ready to trade it in or sell it. With leasing, that future value is predicted up front and put in writing on the contract. Sometimes, a buyer will owe more on the car loan than the car is currently worth. This is only a drawback if you plan on selling it or trading it in. This makes it more difficult to get out of the car because you’ll have to come up with the extra money just to sell.
Another potential drawback of buying is a sizeable down payment. Many lenders require about 10 to 20 percent down when taking out a car loan. On a $30,000 vehicle, this is $3,000 to $6,000. This can vary based on many factors, though, including your credit score, income, level of debt and more. If you’re not able to save up a sizeable down payment, consider waiting to buy, buying a cheaper car or leasing.
One other downside of buying is that for some people’s budgets, lower monthly payments are a must-have. To get the monthly payments down to a smaller amount, lenders will generally stretch the car loan out longer. Auto loans can last five, six or even seven years. Remember that you’ll typically pay more in interest the longer you pay on the loan, so if you can pay it off early or take out a shorter loan, you might be able to save some money. A good rule of thumb when determining monthly payments is $10 a month for every $1,000 financed.
Make sure you sit down with a calculator and take into consideration your budget, your driving needs, your lifestyle and your credit history before you decide whether to buy or lease. The good news is that there are a lot of lenders who can provide you with financing that works best for you, no matter what you decide.