Getting a new car can be exciting, but it can also be a major financial investment. You may be wondering whether you should lease your next vehicle or if buying would be a better choice. There’s a lot to consider.
In this article, you can get a good idea of what buying and leasing cars entails. Exploring your options is the first step in making the best decision for yourself and your finances.
How Does Buying a Car Work?
The process of buying a vehicle is relatively straightforward. When you buy a vehicle, it is yours to keep once you pay it off. Buying a new vehicle will require getting an auto loan in most cases.
The cost of a brand new vehicle can be quite high. Even the relatively affordable cars today are around $20,000 or more once all of the fees are added. For luxury or sporty cars, the costs grow exponentially. Not everyone will be able to qualify for an auto loan, or if they can qualify, there might be a higher interest rate than they are comfortable paying.
Not only will you most likely need to take out a loan, but you will also need to come up with a down payment for the vehicle. The larger your down payment is, the less you will have to pay on the vehicle. If you have a current vehicle that you no longer need, you could use that as a trade-in to help reduce what you have to pay even further.
Once you have a down payment and financing for the vehicle you like, you can drive off the lot. You then have to make monthly payments on the vehicle for the duration of the loan. After the loan is paid off, the vehicle is yours. You could even sell the vehicle while the loan is still in effect, but you will want to pay off the loan with the money you get, so the vehicle is in your name and can be sold.
Buying a Used Car
Of course, you don’t have to buy a brand new vehicle if it’s not within your budget. You also have the option of certified pre-owned vehicles and used vehicles if you need to save some cash. In some cases, you might have enough saved to buy a used vehicle outright. Keep in mind that buying used will mean that you don’t get a warranty in most cases. If you have a certified pre-owned vehicle, it will typically come with a warranty of some type, though.
The Pros and Cons of Buying a Car
Now that you have an understanding of how buying a car works, it’s time to weigh some of the pros and cons.
Pro: No Mileage Limits
When you buy a vehicle, there aren’t any limits to how much you can drive, as there are with leases. You can put as many miles on your vehicle as needed.
Pro: No Charges for Wear and Tear
Since you’re buying the car, you will not be required to keep the car in a certain condition. This is especially great for people with children or animals that they will need to transport in the car.
Pro: Freedom to Sell or Modify the Car
You can also sell or trade in the vehicle and make changes to the color, the interior, the exterior, etc. without worrying about additional fees.
Buying a car tends to be a good option for those who want true ownership of the vehicle. However, that’s not to say that there aren’t some downsides to consider.
Con: Higher Monthly and Down Payments
On average, the monthly payments are higher in most cases when you compare them to leasing a car. There will most likely be a larger down payment required as well.
Con: Long-Term Maintenance Costs
If you buy a car and plan on having it for a long time, there will most likely be a few costly repairs that will need to happen at some point.
How Does Leasing a Vehicle Work?
One of the biggest differences between buying and leasing a car is ownership. When you lease a vehicle, you are paying for the right to drive the vehicle over the term of the lease. The length of the lease can vary but will usually be between two and four years. Leases will typically be financed through the dealership, so you won’t need external financing.
You may still need a down payment, as well as the first month’s payment, and other fees associated with the lease from that dealership. The costs can vary, so you will want to verify them when you are looking into leasing. After providing payments and finishing the paperwork, you can drive home with the vehicle. Keep in mind that even though it might be in your driveway, you still don’t own it.
The Pros and Cons of Leasing a Car
Just as with buying a vehicle, there are pros and cons when it comes to leasing. Here’s a breakdown.
Pro: Lower Monthly Payments
When you lease a vehicle, you can typically expect to have lower monthly payments than if you were to buy.
Pro: Lower Fees, Down Payments, and Repair Costs
The fees for driving off the lot tend to be lower, and in some cases, you might not need to have a down payment at all. The warranty on the car will last through the lease, which makes car repairs cheaper.
Pro: Newer Models are More Affordable
Leasing makes it easier and more affordable to drive newer cars. When you buy a car with the same budget, you may need to settle for an older car.
Leasing a car may be a great alternative for those looking for less of a commitment when it comes to monthly payments and repairs. However, there are some drawbacks to consider.
Con: Mileage Restrictions and Fees
There are mileage restrictions on how many miles you can put on the vehicle each year. Additional fees can be charged for going over the mileage, and there could be other fees, as well, such as terminating the lease early.
Con: Additional Insurance
Sometimes, additional insurance is needed to ensure there is enough to cover the vehicle. Before you lease, make sure you know if there will be any extra insurance requirements.
Con: Vehicle Switching
Once the term of the lease is over, you will have to get a new vehicle or buy the vehicle you’re leasing. To many, switching vehicles may be an inconvenience. However, if you desire to change the car you drive often this could be seen as a benefit to leasing a car.
The Differences Between Buying and Leasing a Car
The table below displays the main differences between buying and leasing. Refer to the table below to help you make your decision on your next vehicle.
Buying |
Leasing |
|
Ownership |
When you buy a vehicle, you are the one who owns it. You can decide how long you want to keep the vehicle, or if you want to sell it. | When you lease a car, you don’t own it. You can use the vehicle, but you are essentially renting it. At the end of the lease, you will have to return it unless you decide at that time that you want to buy it. |
Cost Upfront |
The upfront costs of buying are easy to understand. They require a down payment, taxes, registrations, and similar fees. In some cases, those who have the money may simply buy the vehicle outright, which will eliminate monthly payments. | The upfront costs of leasing include security deposits, the first month’s payment, a down payment, taxes, registration, and an acquisition fee. |
Monthly Payments |
It’s important to remember that the monthly loan payments will typically be higher than lease payments. This is because you are paying off the vehicle, as well as interest, taxes, fees, and finance charges. | The monthly payments on a lease are paying the vehicle depreciation costs, taxes, fees, and rental charges during the term of the lease. This means that the payments are typically lower on vehicles that are the same make and model. |
Returning the Car |
When you are ready to return the vehicle, you will have to sell it on your own, or use the vehicle as a trade-in when you get a new car. | At the end of the lease, you return the vehicle and pay for any fees associated with the end of the lease. |
Early Termination |
You have the option of selling the vehicle whenever you would like. If you still have a loan for the vehicle, you could use the money you get from the sale to pay off that balance. | You could end the lease early, but you will often find that it’s just as expensive as it would be to continue with the lease through the full term. |
Value of the Car |
When you own a vehicle, it will depreciate. However, the cash value of the vehicle is yours and you can do what you like with it whether you opt to keep it or sell it. | While you won’t have to deal with depreciation with a lease, you also do not have any equity in the car. It’s not yours at the end of the lease, so you can’t sell it. |
Wear and Tear |
Since the vehicle is yours, you will not have to worry about any wear and tear that might occur over the years that you own the car. However, excessive wear and tear will likely lower the value of the car if you want to resell it later. | Most of the time, when you lease a vehicle, you are responsible for the wear and tear of the car. You may have to pay extra charges in cases where the wear and tear are deemed as being excessive. |
Mileage |
You don’t have to worry about mileage when you buy a vehicle. You can drive it as many miles as you need or would like. Of course, when you have a lot of miles on your vehicle, it could lower the value if you want to trade it in or sell it later. | You are limited to the number of miles that you can drive in a year on your lease. This number is typically between 10,000 and 12,000 miles. If you go over that amount, you will have to pay additional fees. In some cases, it might be possible to negotiate with the company for a higher limit on the mileage. |
Customization |
When you buy a vehicle, it’s possible to customize it to suit your needs. Of course, you still want to be careful when it comes to modifications, so you do not void your warranty. After the vehicle is fully paid off, you can do with it as you wish. | Remember that you are not the owner of the vehicle. This means that you have to return it in a condition that’s considered salable. This means removing any customizations that you might have made. |
End of the Term |
After the loan term is complete, the vehicle is fully yours. You have equity in the vehicle, which you could use to help fund your next vehicle. | When the end of your lease term arrives, you have a couple of options. You could choose to lease another vehicle, finance the purchase of the vehicle you leased, or decide to buy your next vehicle. |
Things to Consider Before Buying or Leasing
You will want to keep a few things in mind when making your decision to buy or lease the vehicle.
Costs
First, there are the costs. What will the monthly payments be like and can you afford them? What is the price of car insurance for the vehicle? Consider the down payment, depreciation, repairs, leasing fees, and other fees.
Flexibility
In addition to the costs, you also have to consider flexibility. Those who need more flexibility in mileage and customizing their vehicle will find that buying is a better option. Those who want lower monthly payments and who do not tend to drive a lot may find that leasing is a better financial option for a new car.
Takeaway
Which of these is the better option? The truth is that there’s not a “best” option that will work for everyone. It will all depend on your needs and preferences. Consider all of the information discussed above and then determine which option will best suit your lifestyle.
To get the best deal, you will want to shop around whether you are buying or leasing a car. Look for deals from different dealerships. There are often deals around various holidays, which can help you to keep the cost of your lease or purchase down.
Lastly, keep in mind that the best financial decisions are always going to be the ones that have some thought and intention behind them. You got this!
