We’ve all seen the commercials: get an awesome new car with all the features for a crazy-low monthly payment! These ads can make leasing a vehicle sound like a slam-dunk, but is leasing vs. buying a car a better deal?
Shopping for a car is an involved process. You must consider everything from safety to what color car you want.
Perhaps the most crucial decision when shopping for a car is financing. It’s great to buy a car with cash, but that’s not an option for everyone. If that’s your case, you may want to know the differences of buying vs. leasing a car and which is best for your new car purchase.
Like any major purchase, leasing or buying a car has a unique set of circumstances. Both have different pros and cons, not to mention costs. If you’re in the market for a new set of wheels, our guide will help you make the best choice.
The Difference Between Buying and Leasing A Car
The difference between leasing a car vs. buying a car typically involves two factors. Those are:
- Who ultimately owns the car
- How you pay for the car
When you buy a car, you typically finance the car through the dealer or local bank. This comes in the form of a loan you pay off until the end of the loan term. Once you pay off the loan, the car is yours.
You incur any depreciation yourself, but you can keep it for its full lifetime. You may even sell it if you no longer wish to own it.
Buying a car typically requires a down payment and a credit check. Your loan company and the dealer may require other terms as well, but that will vary.
When leasing a car, you still make payments but it’s not a loan. In essence, you rent the car from the dealer and make payments to them for the usage of the automobile. Once the lease term is up, you return the car to the dealer.
This means you do not ultimately own the car. You’re paying to have the benefit of a new car and nothing else.
The above are merely the basics of the two possibilities. It’s important to consider the pros and cons of leasing vs. buying a car before you make a purchase decision.
Leasing vs. Buying A Car: Pros and Cons
Both buying and leasing a car have their own unique set of benefits and drawbacks. We’ll first cover the pros and cons of leasing a car, then buying a car.
Pros of Leasing A Car
Leasing a car has several benefits. Below are the top perks of leasing.
Drive A New Car
When leasing, you aren’t stuck with a car for an extended period. Many leasing terms range from 18 months to 36 months. This allows you to drive a new car every few years.
If you’re the type of person who loves driving new cars, but don’t want to deal with older cars needing extra maintenance, this may be a huge pro for you.
Warranties and Maintenance
When you lease a car, many dealers offer maintenance and repairs (within warranty) for free as long as you have it. You can save money on services like oil changes, tire rotations, which means more money in your pocket.
Smaller Down Payment
Generally, leasing a car won’t involve interest, allowing you to have lower monthly payments. You may also be able to avoid sales tax, though this does vary state to state. Together, these help by allowing you to have a smaller down payment vs. what’s needed to buy a car.
Cons of Leasing A Car
Not everything is perfect when leasing a car. Below are the top drawbacks of leasing a car.
You Won’t Own It
The biggest con with leasing a car is you won’t own it. After the end of your lease, you’ll return it and lease another car, or buy one.
The money you put down and paid over the term of your lease won’t go towards anything other than the privilege to drive the car during the lease.
Not A Great Daily Driver
If you live near everything you need and want, including your job and other responsibilities, this may not be a con for you. But, if you live in a rural area, or work fairly far from home, leasing a car can cost you extra money.
When you lease a car, you sign a contract that states that you have mileage limits on the car. In other words, you’ll only be able to drive the car until you reach a certain number of miles, let’s say 10,000 miles a year. For many people, they can easily go over that amount in a few months.
When or if you do go over your mileage limits, you’re charged a specific amount for each mile you go over. While there isn’t a specific number for this charge, it could be anywhere from $0.10 cents to $1.00 a mile over the limit.
Costs At The End
Did you know that while you don’t have to pay much money upfront to lease a car, you do have to pay costs at the end of the lease? Below are a few of the extra costs you can incur at the end of the lease:
- Additional miles charge
- Excessive wear and tear charges
- Costs to clean the car
Prices and terms vary, but make sure you read your contract if you decide to lease a car.
The benefits of leasing a car are tempting. However, those benefits can come with increased long-term cost vs. buying a car, not to mention having nothing to show for your payments at the end of the lease term.
Pros of Buying A Car
Buying a car has several benefits. Below are the top perks of buying.
You Own It
Even if you finance the car, eventually, the title and the car will belong to you fully. And even before that happens, you have the rights to the car that a lease owner won’t have.
For example, you’ll be able to pick the type of insurance you want, whether or not you use the car for a side hustle, and more.
Drive As Much As You Want
Unlike with leasing a car, you can drive a car you own as much as you want. This is great if you find yourself driving your car a lot.
With leasing a car, you’re not allowed to make changes or modifications. But with your own car, you can add in new speakers, decal the back, or whatever you choose to do with it. The car is yours, so you don’t answer to anyone when it comes to how you modify it.
Buying A Car is Cheaper in the Long Run
While car payments are bad, especially if too big, they’re cheaper over the long-term. You can pay off your loan early, saving interest.
You can even refinance your loan through someone like Lending Club Auto Refinance to lower your interest rate. Neither are options when leasing a car. That’s also not to mention the fact of the constant payment cycle with continuous car leasing.
Cons of Buying A Car
Not everything is perfect when buying a car. Below are the top drawbacks of buying a car.
Sales tax can take a substantial chunk out of your budget when you buy a car. While this isn’t a recurring expense, it is something that can cost you a pretty penny, especially when you think about other costs associated with getting a new car.
When you own a car, you have to pay for maintenance and repairs, over the life of the car. While these costs may not be much upfront, they can add up significantly as the car gets older and needs more to keep it running. These costs are in addition to the depreciation of the car you incur.
And, if you get a car that’s notorious for breaking down after certain mileage or years, you may find that problem on your hands sooner rather than later.
Fewer Warranty Options
Many car dealerships have warranties for their cars, and even car manufacturers have limited warranties for certain parts of the cars. However, those warranties may cost more money upfront or will run out at a certain point, such as 100,000 miles.
If you plan on keeping the car for longer than a few years, you may run into problems that warranties don’t cover. This adds more out-of-pocket expenses you incur.
The benefits of buying a car vs. leasing are many. However, we all have different circumstances to consider before making a final decision.
Questions To Ask When Buying or Leasing A Car
Whether you’re buying or leasing a car, there are a few questions you need to ask before signing your name on the dotted line.
Before you lease a car, the first question you should ask is “What is leasing a car and what exactly does it mean for me?” While we’ve talked about some of the pros and cons, you want to get a full picture from the dealer.
Leaving without knowing what’s expected of you can result in higher costs you may not be prepared to pay.
Your other questions should include the term, rates, rules, maintenance you’ll have to cover, and the payments you must make. You’ll also need to know the type of lease you’re getting yourself into and what how much it would cost if you go over your mileage limits or put wear and tear on the car.
The last questions you should ask is if there’s a penalty for breaking the lease early and if you need any special car insurance.
When buying a car, the first few questions you’ll need to answer yourself. For example, what is your budget, and what can you afford?
Can you afford a new car, or do you need or want to buy used? Who will you plan on getting your loan through, and is your credit score high enough to qualify for a loan?
If you choose to buy, you can use a service like Edmunds to find a new-to-you car. The service also allows you to filter potential cars to find the best possible fit for your needs.
The benefits of leasing a car vs. buying vary, but most important is to ensure you stay within your budget. You don’t want to take on a payment that stresses your budget and keeps you from reaching other goals.
A service like Tiller can help you track your spending to identify areas to cut. This frees up money for your car purchase – whichever route you choose to take.
Buying vs. Leasing A Car: Bottom Line
Having a new car to drive every few years is tempting for many. However, it comes with added costs. Unless you have a specific reason for leasing a car, buying is often the better option and saves money over the long-term.
Shopping for a new car is not a cheap endeavor. There are many points to consider. Just make sure you find a car that meets your needs without being a drag on your budget.
Where do you stand on leasing a car vs. buying a car? How much is your car payment each month? Do you think it’s good to buy a car with cash?
Source: Frugal Rules