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Leasing a Car vs. Buying a Car: Which Is Right for You?

By Stephen Fogel, June 20, 2018

leasing vs buying a car

If you’re in the market for a car, there are a two primary ways to get yourself behind the wheel: leasing or buying. There are pros and cons to each, but how do you know which one is right for you?

All things considered, leasing a vehicle will typically be more expensive in the long run. But there are advantages to leasing that can offset that expense, depending on your preferences and situation. And if you choose to buy, but don’t keep the car long enough, any potential savings will disappear. 

Should you lease or buy?

The right answer really depends on your priorities and plans. Leasing is the way to go if you:

  • Like having the newest vehicles with the latest technology
  • Want to avoid having the car’s warranty expire
  • Are fine with always having a car payment, as long as it’s not incredibly high
  • Are going to primarily use the car for business

On the other hand, you should buy if you:

  • Like to feel the bond between yourself and your car
  • Want to achieve the lowest possible overall cost of vehicle ownership
  • Plan to own the car long enough to pay it off and even keep it beyond that point
  • Want to make some personalized touches

There’s a lot more to it. Let’s look at the big difference between leasing and buying, and then go through the pros and cons of each.

Main difference between leasing and buying

Leasing is kind of like renting a vehicle long-term. When you lease a car, you don’t own it — the leasing company or bank does. You are essentially paying to use the car for, typically, three years. At the end of the lease term, you turn in the car and walk away. You can then lease or buy another vehicle.

When you buy a car, the vehicle will be titled in your name. This means that you own it — minus any unpaid balance on the car loan — and can sell it at any time. This gives you a lot of flexibility. Plus, once you pay off the loan, you’re done with monthly payments, at least until you get another car.

Whether you lease or purchase a new vehicle, once you drive it off the dealer’s lot, it loses 15% to 20% of its value. This is called depreciation. This process continues over time, with most new cars losing about half of their value by the time three years have gone by. 

Leasing a car

Leasing is one way to drive the vehicle you want at the lowest cost, and with the fewest ownership hassles. Leasing now accounts for over 30% of all new vehicle transactions. Let’s look at what’s good and bad about it.

Pros

Leasing costs you less upfront: When you lease a car, your down payment is much lower — even as low as zero, if you have good credit. Your monthly payments will also be lower, meaning you can likely afford a much better vehicle than you could actually buy. You can play this either way: More money in your pocket, or a nicer car in your garage.

Your car always has a warranty: If you lease, make sure the term doesn’t exceed the length of the manufacturer’s new car warranty. This will protect you from any unexpected mechanical repair expenses during the course of the lease. 

You always have the latest technology: Infotainment screens, driver assistance technologies, new forms of propulsion — new cars always have the latest, coolest stuff. For many consumers, a vehicle with yesterday’s tech is undesirable, and maybe even unusable. When you lease a car every three years or so, you’re guaranteed to have the latest safety, fuel efficiency and communication features.

You can get tax advantages: Tax laws allow more generous deductions if a leased car used for business instead a purchased car. Talk with your tax advisor if you use or need a car for business purposes. Also, in most states, you pay sales tax only on the lease payments, and not on the entire cost of the car, as you would if you purchase. This can save you a lot of money. 

Cons

You have to stay within the mileage limits: Leases come with mileage limits, typically 12,000 miles per year. And the average person drives their car about 12,000 miles a year — what a coincidence. If you’re under that average, you’re golden, but if you go over the limit, you’ll have to pay a fee, typically about 25 cents per mile. Plus, if you exceed the number of miles included in the new car warranty (usually 36,000), you’ll be liable for mechanical repairs that are necessary past that point.

You must keep the car in good condition: The terms of your lease require the vehicle to be returned in excellent condition, inside and out. Any damage will have to be fixed — and paid for — by you before you turn in the car. If you have a hard time keeping your car clean, or you live in an environment that’s hostile to car bodies, this requirement could end up costing you a lot.

You always have a monthly payment, with no equity: If you own a car, you can get to the point where it’s paid off, meaning you don’t have to send money to a financing company each month. But if you lease, you’ll owe a few hundred bucks every time, until you either buy and pay off a car or stop driving. And, if you lease, you get no value out of however much the car is worth when your lease ends. If you buy, you can sell or trade in the car when you want and get some value out of it — assuming you wait long enough.

Buying a car

Owning a car is still the preferred method for most Americans. People can feel a bond with their vehicle, treating them like part of the family. Here’s what’s good and bad about buying a car.

Pros

You own the car: Many people like the feeling of ownership and plan to keep their vehicles after their loans are paid off. This provides them with a period of payment-free ownership. To maximize this stretch of time, try to take no more than a five-year loan when buying a new car, or a three-year loan on a used one. The amount you pay each month will be higher, but you’ll spend less on interest and more time not having to worry about car payments.  

There are no mileage limits when you buy: If you need to drive a lot of miles, buying is a better option. Limits on how many miles you drive are a part of every lease, since mileage is a major factor in the value of the vehicle. If you put more than 12,000 miles on your car each year, buying will be wiser.  

You can customize the car: If you’re the type of owner who likes special touches added to your vehicle, you’re much better off buying it. Leased vehicles must be returned in factory condition at the end of the lease. When you buy, you can do whatever you’d like to make your car one of a kind.

Cons

You spend more initially: Because you are purchasing the entire vehicle, and not just the part you’re using, it costs much more upfront to buy. If you can afford this and want to keep the car for a number of years, go for it. But if you end up selling the car after, say, three years, you would have been better off leasing.

Warranties run out: The average vehicle loan term is longer than the average warranty. This exposes you to the high costs of major repairs that may be necessary after the vehicle’s warranty expires. Research has shown people are keeping their cars for an average of six years, and the average car on the road is more than 11 years old. As a car ages, it can become less reliable, meaning repair expenses could start piling up. 

Trading in too soon creates more debt: The average new vehicle loan term has grown to 69 months, and is increasing. This is a result of steadily increasing vehicle prices and rising interest rates. As a result, the value of your rapidly depreciating vehicle is worth less than the balance on the loan for a long time, until the loan is just about paid off.

If you decide to trade in your vehicle for a new one every few years, this “negative value” can be several thousand dollars each time. This means that all those thousands of dollars will have to be added to the new loan in order to bail you out of the previous loan. This is referred to as “being underwater.” You’re digging a deep hole of debt, especially if you repeat the process multiple times. This is bad for your financial health, and should be avoided.

 

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