When you’re in the market for a new vehicle, you can take two major paths: leasing or buying. While both options put you behind the wheel of a car, they significantly differ in terms and implications. Leasing is akin to a long-term rental, where you pay a monthly fee for using a vehicle for a predetermined period. In contrast, buying involves financing or outright purchasing a car, granting you ownership once all payments are made.
What Is Leasing?
Leasing a car is an agreement between you and a leasing company. Essentially, you’re renting the vehicle for a specific period (usually 2-4 years). At the end of the lease term, you return the car to the dealer.
What Do You Pay for With a Car Lease?
With a car lease, you pay for the depreciation of the vehicle during the lease term, plus interest, taxes, and fees. Depreciation is the difference between the vehicle’s initial cost and its residual value at the end of the lease. Interest (also called the money factor) is equivalent to the interest on a loan. There are also potential extra charges for excess wear and over mileage.
What Is Car Buying and Financing?
Buying and financing a car is the process of obtaining a loan to purchase a vehicle outright. The lender pays the full price of the car to the seller, and you repay the lender, typically over a period of 4-7 years. Once you finish paying the loan, you own the car outright.
What Are the Benefits of Leasing a Car?
Leasing offers numerous benefits that make it a preferable option for some people.
Lower Monthly Payments
One of the significant advantages of leasing is lower monthly payments. Since you’re only paying for the vehicle’s depreciation, the cost is often less than financing the car’s full purchase price.
Latest Technology
Leasing allows you to drive a new car every few years. This means you’ll always have access to the latest technology, safety features, and fuel efficiency advances.
Warranty Coverage and Maintenance
Most lease terms coincide with the manufacturer’s warranty period, meaning most repairs are covered. Some leases even include routine maintenance, such as oil changes.
Trading-In Is Simple
With leasing, there’s no need to worry about selling your car when you’re ready for a new one. You simply return it to the dealership and lease another.
You May Save Some Sales Tax
In some states, you only pay tax on the amount you put down and your monthly payments, not the vehicle’s total price.
Potentially Smaller Down Payment
Leasing often requires a smaller down payment than buying, making it more accessible for some people.
What Are the Downsides of Leasing a Car?
While leasing has its perks, there are some disadvantages.
You Don’t Own the Vehicle
When you lease, you don’t own the car. You have to return it at the end of the lease unless you choose to buy it.
You Always Have a Car Payment
Leasing means perpetual payments. When one lease ends, you often start another, meaning you always have a car payment.
There’s a Mileage Limit
Leases come with mileage limits. If you drive a lot, you could end up paying hefty fees for exceeding the limit.
You Can’t Customize Your Ride
Leased vehicles must be returned in their original condition, limiting your ability to customize.
No Cash For Your Next Car
When the lease ends, you don’t have a vehicle to trade in or sell to fund your next car.
Surprising Lease-End Costs
You’ll incur additional charges if you return the car with damage beyond normal wear and tear or over the mileage limit.
Use Restrictions
Since you don’t own the vehicle, you must follow the lease agreement’s terms and conditions, which can include restrictions on how you use the car.
Leasing With Bad Credit Can Be Tough
Poor credit history can make it challenging to secure a lease agreement or may result in higher interest rates.
You Need Gap Insurance
Most leases require gap insurance, an additional cost that covers the difference between the car’s market value and the remaining lease payments if the vehicle is totaled or stolen.
Leasing Can Be Complicated
The terms and conditions of lease agreements can be complex and challenging to understand for many people.
Lease Deals Are Limited
While dealerships offer lease deals on specific models, your choice may be limited compared to buying a car.
You Can’t Get It Fixed Just Anywhere
In many cases, lease agreements stipulate that all repairs must be made at the dealership or approved service centers, limiting your options.
You Have to Return It in Great Shape
When returning a leased car, you may be charged for excessive wear and tear, leading to potential unexpected costs.
It’s a Binding Contract
Lease contracts are binding and difficult to break without hefty penalties.
What Are the Benefits of Buying a Car?
Buying a car has numerous advantages that can make it a better option for some.
You Own the Car
Once you’ve finished paying your car loan, you own the car. You’re free to keep, sell, or trade it as you wish.
You Can Drive and Drive and Drive
When you buy a car, there are no mileage restrictions. You can drive as much as you want without worrying about additional fees.
You Can Get Cash to Pay For Your Next Car
If you decide to sell or trade-in your car, the money can be used towards your next vehicle.
Make It Your Own
You have the freedom to modify and customize your car to your liking.
No More Payments When the Loan Is Paid Off
Once you’ve paid off your car loan, you own your car outright. Unlike leasing, there’s an end to the monthly payments.
You Can Sell on Your Own Schedule
When you own a car, you can decide when to sell or trade it, providing flexibility.
Financing Is Easier Than Leasing
Financing a car is typically a more straightforward process than leasing and can be easier for people with less-than-perfect credit.
Refinancing Can Save You Money Down the Road
If interest rates drop or your credit score improves, refinancing your car loan can reduce your monthly payments.
You Can Fix it or Not!
When you own the car, it’s up to you where it gets repaired or if you want to fix it at all.
What Are the Drawbacks of Buying a Car?
There are, of course, a few downsides to buying a car.
Buying a Car Is More Expensive in the Short Term
Monthly payments are typically higher when you finance a car, as you’re paying for the entire cost of the vehicle, not just its depreciation.
You Have to Pay Interest on the Entire Cost of the Car
With a car loan, you pay interest on the entire purchase price of the car minus your down payment, even as the vehicle depreciates.
You May Have to Pay More Sales Tax
In many states, when buying a car, you must pay sales tax on the entire purchase price.
To Get the Best Terms, Make a Down Payment
A substantial down payment may be required to secure the best financing terms.
The Car’s Future Value Is Unknown
When you buy a car, its depreciation is your risk. Depending on the model and the market, your vehicle may not hold its value as expected.
The Warranty Will End
While new cars come with a warranty, it will eventually end. Once it does, all repair costs are on you.
What Factors Should I Consider When Leasing or Buying a Car?
Whether you should lease or buy a car depends on your lifestyle, driving habits, and financial situation. Here are a few key factors to consider:
Mileage: Buying might be a better choice if you drive a lot due to mileage limitations in lease agreements.
Wear and Tear: If your car is likely to get a lot of wear and tear, buying might be a better option, as excessive wear can lead to extra leasing charges.
Affordability: Consider whether you can afford higher monthly payments for buying a car or the lower monthly lease payments would better suit your budget.
Ownership: If you like the idea of owning your car and the flexibility that comes with it, buying is your best bet.
New Cars: Leasing is a great option if you enjoy driving a new car every few years and don’t mind always having to make a payment.
Technology: If having the latest safety features and technology is important to you, leasing allows you to upgrade to a new car more often.
Credit Score: Generally, you need a good credit score to lease a car. If your credit score needs work, buying could be the better option.
In the end, the decision between leasing and buying is highly personal and depends on your unique circumstances. It’s important to weigh the pros and cons of each to determine which is the best fit for you. It can be helpful to consult with a financial advisor or use online calculators to help crunch the numbers before making a decision. Regardless of which path you choose, make sure it’s one you’re comfortable with and fits your needs.
Connect with us
