While both options provide some great benefits, there are several things to consider to determine which is right for you.
What Does It Mean to Lease a Car?
First, it helps to understand what leasing a car means. When you lease, essentially, you are renting the car, typically for 2-3 years. At the end of the lease term, you will return it to the dealership or decide to purchase the vehicle with a new loan.
When you lease a car, you pay a monthly payment, which is a form of financing. During your lease period, you essentially only pay for the depreciation of the vehicle during the lease term.
This is one reason why monthly lease payments are usually lower than a monthly loan payment when you purchase a vehicle.
When you sign a lease, you usually need to make a down payment and pay taxes and fees. This amount can vary but plan on spending $2,000 - $3,000 to be safe.
Another consideration is maintaining the condition of the car. When your lease is up, and you return the vehicle to the dealership, they will inspect the car's state. Normal wear and tear are factored in, but dings or scratches could count against you and cost extra when your term is up.
Your lease agreement will also include stipulations about the number of miles allowed throughout the lease, typically 12,000 - 14,000 per year. If you go over your allotment of miles, you will owe extra when your lease term is up, usually .15 per mile.
What Does It Mean to Buy a Car?
When choosing to buy a car, you borrow the vehicle's full price upfront, minus any trade-in-value or down payment. Most people choose to finance the vehicle's price and spread out payments over 60 months (5 years).
As with leasing, factors such as the amount of your down payment, the trade-in value of your current vehicle, and the quality of your credit score will impact your monthly costs.
The difference here is your payment isn’t just based on depreciation, but the actual price of the car. So while monthly payments may be a bit higher and spread over more time, you aren’t limited in the miles you choose to drive, among other factors.
When the loan is paid off, you own the car outright. If you decide to sell the car before your loan is completed, you are free to do so. You can trade it in for another vehicle or sell it to a third party. What you make on the sale will depend on how much you have left on your loan.
Who Might Benefit from Leasing a Vehicle?
Here are common conditions of those who would benefit from leasing a vehicle.
Infrequent Use: If you frequently take public transportation or only need your vehicle sporadically. Alternatively, if you’re purchasing a secondary car and won’t need to drive it often.
Temporary Use: If you only need a car for a few years because you’re moving temporarily, or a similar situation, you might benefit from leasing instead of purchasing.
Desire to Upgrade: If you like to purchase a new car every 1-3 years, you might benefit from leasing. In this case, you are usually familiar with leasing. You don’t plan to go over your mileage allotment, lease with the plan to return the car in good condition, and begin a lease on a newer car.
When Might Buying Make More Sense?
Here are common conditions of those who would benefit from buying a vehicle.
Families with young children - Even parents of the best-behaved children can attest to a spilled sippy cup or melted crayon on the seat from time to time. Unless restored to the original state, these kinds of accidents can cost you extra when you lease. When you own the car, you may disapprove of the mess, but you won’t be penalized for it.
Unsure about mileage - If you aren’t 100% comfortable staying in the mileage limits of a lease, it might make more sense to buy. Driving over your limit will cost around .15 per mile. Clock an extra 1,000 miles during a three-year lease, and you can expect around $450 extra when your lease is up. When you purchase a car, you are free to drive as many miles as you choose.
Being hard on your vehicles - Do you go on rocky roads, transport kayaks, mountain bikes, or other sporting equipment regularly? These items can cause dings or scratches, which could cost you when your lease term is up. In these cases, buying is often the best option.
Long term use - If you plan to keep your car for an extended period, it would be better to purchase even after the loan is paid off. For drivers who keep their cars for 5, 7, or even 10 years, buying is usually the better financial option.
Making The Decision to Buy or Lease a Car
Choosing to buy or lease a car is based on financial health and personal preference. Both offer pros and cons, depending on your needs and lifestyle.
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How Leasing Works