The Pros/Cons of Leasing vs. Buying a Car
Although it's something most people have to consider eventually, choosing between leasing and buying a car is often a difficult financial decision. Both methods of acquisition can put you in the driver's seat of your favorite vehicle. Yet, how you choose to get your asset has financial implications.Arguably more people tend to lease these days than to take out a car loan. That doesn't mean you should do the same until you know more about your options.
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Buying a Car
People often buy their cars in one of two ways. They can buy it outright with cash or take out an auto loan. Using a loan often means committing to high monthly payments compared to leasing. In addition, the qualification requirements can be fairly stringentincluding requiring a good credit score in order to guarantee that you get approved with a reasonable loan rate. Experian, one of the three credit bureaus in the United States and a regular publisher of research, showed in an article in 2020 how your credit score correlated to your loan rate. In short, the difference in being a super prime borrower (for example, having a 750 credit score) and being a subprime borrower (a 600 credit score) can be greater than 8% or three times the financing cost.
Leasing Overview
A lease means that you can drive the car off the lot without owning it. You make an initial down payment that covers various taxes and other costs. Then, you pay the financing companya monthly fee for renting the car for a set amount of time.After the lease period ends, you have two choices. Return it to the dealer and get a new car, or buy the car for whatever amount defined in the contract.
Benefits of Leasing
To start things off, leasing is cheaper than buying at first. For example, monthly lease payments are cheaper than loan interest rates because you have no principal to repay.
Another advantage is that you can drive a car outside of your price range during the best years of its life – the first three, fresh out of the factory.
Typically, leased cars come with the latest comfort and safety features. Business owners can benefit from tax deductions.
You can also factor in that you won’t need toworry about selling the car when you're ready for an upgrade. The process can be tedious, and the trade-in value might be disappointing. Leasing takes these things off your plate.
Generally, you can expect free oil changes, some maintenance work, and the full benefit of a new car warranty from the manufacturer.
The Ugly Side of Leasing
When talking about cons, one thing stands out: you can end up paying for years and never actually own a car, especially when moving from lease to lease.
In the long run, you can end up spending more on monthly payments than taking out a loan and buying a car. Leasing has you renting and using a car in the years when its value rapidly depreciates.
In contrast, paying off your loan and continuing to drive the car gets you more value out of it. People may have different views on when a vehicle has run its course. Yet, the cheapest method of ownership is to use your car until it doesn't make sense to repair it.
There are some other things people overlook when it comes to leasing. For example, most contracts impose a mileage limit. Go over it, and you can expect to pay penalties on top of your monthly payments.
Furthermore, leasing companiesexpect you to bring the car back in good to excellent condition. Wear and tear is unavoidable at times, andyour definition of normal wear and tear might not match the lessor’s.
Early termination fees can also put you in a difficult spot, financially – should you be unable to make payments or if you're no longer happy with the car. Certain maintenance or repair work might get expensive, given that people are incentivized to opt for premium cars when leasing.
Pricey vehicles call for costly replacement parts.
The Loan Alternative
If you have the money to buy a car, you're probably not interested in any type of exchange such as leasing and loans. However, it's best to understand the pros and cons of loans, too, if you're considering buying a new vehicle.
First of all, you won't have any mileage limits. The moment you make your downpayment, the car is yours. You can drive it, sell it, trade it – whatever you want as long as you keep making your payments.
Secondly, there are no penalties to worry about regarding wear and tear.
As far as downsides are concerned, you'll have to prepare for higher monthly payments. On top of that, securing a loan may incur a larger initial payment. So, if you haven't saved, you might not be in a position to buy.
Similar to homeownership, owning a car demands a long-term commitment. That means taking on the responsibilities of maintenance. After a while, when something breaks, you have to pay to fix it – unless you're a good mechanic yourself.
With that in mind, there's plenty of flexibility to go both ways. Preference plays a part in the decision-making process. But, your financial situation and future plans should ultimately be the guiding forces behind your choice.
Remember That Vehicles Exist to Take You From Point A to B
A fancy car isn't always the superior choice. It's not necessarily safer, more economical, or better than a cheaper alternative. If you want a personal vehicle, then it probably needs to satisfy a specific purpose. If you're worried about how much you're going to pay, it's best to stick within a realistic price range, whether buying or leasing.As for the funding, it can go either way. If you only need a car for a limited amount of time, then leasing is the better option.
If you're strapped for cash and can't afford to buy, leasing can put you in the driver's seat fast.But if you have some moneyput aside, buying a car is often the better choice. Especially if you plan on using it for years to come, this option will save you money in the long run. At least consider that after a lease expires, you'll have to get another car, and you'll be starting a new payment schedule from scratch. Once you pay off your loan, you can still squeeze plenty of value out of the vehicle.
