Buying vs. Leasing
Getty Images/David McNew
Most shoppers aren t able to pay cash for a new car, so you ll need to decide how you re going to finance it. While many people take out a car loan, leasing a new car is simply another form of new-car financing. Let s look to see if leasing or buying makes the most sense for you.
Benefits of Leasing a Car
Leasing a car is similar to financing the purchase of the car in many ways, but there are some key differences. You might be able to get more car for less money by leasing. That s because a car loan is based on the full price of a new car, while a lease is based on only a percentage of the car s price. For example, on a $30,000 car, you d finance the entire $30,000 purchase price with a car loan. With a car lease, you only pay the difference between the car s price and what it s expected to be worth at the end of the lease, which is a car s residual value. So if the car s residual value is 55 percent after three years, for example, that means the $30,000 car would be worth $16,500 at the end of the lease. You d make lease payments on the remaining $13,500 and not the full $30,000.
If you only have a small down payment saved up, leasing may also be better for you. Many car 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 lease payments will be higher.
Many leases last about three years, which is typically the length of many new-car bumper-to-bumper warranties. That means the car is usually 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 at the end of the lease.
If you enjoy having the newest high-tech features, leasing could be the better choice for you. Since you d be leasing every few years, each new car you lease will have the latest and greatest technology and safety features. With a leased car, you don t have to worry about selling the car or getting a good price for your trade-in. When the lease is up, you can simply turn in the car and walk away.
Drawbacks of Leasing a Car
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 that amount, 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.
With leasing, you can sometimes make minor alterations to the vehicle that can be reversed before you turn the car back in, but you generally can t make any major alterations. Make sure you read the lease contract carefully before signing.
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. Since you re basically renting the car when you lease, you re not building any equity. That means that when the lease ends, you either have to get a new car, with new payments, or take out a loan to buy the car you were leasing.
Another potential downside to leasing is that usually only shoppers with good credit scores will qualify for a car lease. If your credit score is less than perfect, you may want to consider waiting to lease until you can increase your credit score.
Benefits of Buying a Car
If you like to keep your vehicle as long as possible, buying is probably better for you. When you buy, you own the car when the loan is paid off. Until the car loan is paid off, the lender owns the vehicle. As you continue to make loan payments, you re gaining equity in the vehicle. Once you re done paying off the loan, the car is yours you own it and don t have to include a monthly car payment in your budget. That s a significant benefit because it means that over several years of not having a payment, you could save money compared to someone who has to keep leasing a new car every three years.
One of the biggest benefits that buying has over leasing is that there are no mileage restrictions. If you do a lot of driving, buying is probably better for you.
Drawbacks of Buying a Car
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. If the car is worth less than that amount at the end, it s not your problem. However, if you have a loan on a car and the car is worth less than what the loan is for, you have negative equity (that s also called being upside down on the loan). This is only a drawback if you plan on selling it or trading it in because you ll have to come up with the difference between what the car sells for and the amount of money still left on the loan.
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, that s $3,000 to $6,000. It can be tough for people to save up that much money.
One other downside of buying is that to get the monthly payments to fit your budget, you may have to stretch out the length of the loan. Auto loans can last five, six or even seven years. That longer loan term gives more time for interest to add up, so you end up paying more for the car than if you had a shorter loan term. A larger down payment will also help lower your monthly payments when you finance, but again, coming up with that much cash can be difficult.
When it comes to buying and leasing, there s no one-size-fits-all answer. Consider your budget, driving needs, lifestyle and credit history before you decide whether to buy or lease. There are auto lenders who can provide you with financing that works best for you, no matter whether you decide to buy or lease your next vehicle.