Whether you’re moving into a city with unreliable public transport, just got promoted, or expanding your family, the decision to lease or buy a car is a big one, and it comes with financial implications. But money isn’t the only thing you need to consider when comparing buying vs. leasing a car. You also need to consider your lifestyle and personal taste before deciding whether to buy or lease a car.
It has often been a tough call choosing between buying vs leasing a car. On the one hand, when you buy a car you’ll incur a higher monthly cost, but in the end, you get to own the car. But in the case of leasing, though the monthly cost is lower, you’re not really the owner of the car.
In this article, we’ll go over the major advantages and disadvantages buying vs leasing have over each other so you’ll know which option to pull the trigger on.
For some time now, the leasing landscape has slowly been transforming for the benefit of the average consumer. Decades ago, a large proportion of leased cars have mostly been luxury ones. But that has changed. An increasing number of compact cars such as sedans, small SUVs, etc. have found their way into the new-car lease market. Coupled with attractive financial rates, some lease deals look pretty good.
You might think automakers are more interested in their cars getting sold, but that’s not entirely true. Don’t get me wrong, automakers still want to sell the most number of cars that they can to make more profit, but they’d rather have those cars leased than sit on the car lot and lose value or compete with new models.
Leasing helps keep a steady supply of used-cars, which in turn helps boost resale value of a used car. When the resale value on a car is high it, therefore, means that the car is slower to depreciate, which means that the car model is cheaper to lease. And this benefits the consumer.
Besides that, when the lease agreement ends and the customer returns the car, those customers get in direct contact with the dealership. This offers the dealer the opportunity to convince them to take a new car, which a customer off-lease will definitely need.
Low-interest rates have also found a way into lease contracts, which helps reduce their cost. One important part of the economics of leasing is the interest rate because when you look at it leasing is just another way to finance a car.
Another tactic car dealers use to boost the resale value of a car is in the low mileage permitted in some new leases: instead of the customary 12,000-15,000 miles, a typical lease will have 10,000 miles. For those that don’t drive much this might be fine, but the average driver will surpass that figure each year.
I see it as a mixed blessing that a growing number of lease contracts now come with terms of less than 36 months. Sure, it’s a good deal for someone that doesn’t want to be trapped into a long contract. But the steepest part of a car’s depreciation curve is in the first two years, which makes for an expensive lease period.
However, it’s now a common thing in the car-loan market for customers to stretch out the loan payment period for around six to eight years in order to keep the monthly payment manageable. Some of those people may be better off leasing.
Below are some of the advantages and disadvantages of buying vs. leasing a car.
Monthly car loan payments are generally more expensive than a lease payment. But, with each loan payment, you’re building up equity for the future when you decide to trade it in or sell it. One of the easiest ways to own a car is to buy one, drive it for a couple of years while paying it off slowly. Besides, the car costs less to own the longer you drive it.
When you use a car loan to finance the purchase of a car, you have the flexibility to sell it or trade it in at any time. There’s no fixed ownership period like you’d see in a car lease agreement.
It’s much better to opt for ownership if you need to drive a car for as many miles as you want without the fear of additional fees. Leasing contracts come with limitations on the number of miles you can drive a car for, and you’ll be charged a hefty fee when you surpass the limit.
If you want a car that you can customize, accessorize, or just drive without having to worry about every little dent, then you should consider buying over leasing.
The general consensus is that a car loses 20-40% of its value within the first few years. The advantage you have when you buy a 2- to 3-year-old-vehicle is that you get to pay a price that reflects a substantial depreciation discount.
The good part about buying a car is that you can spread out the payment over a longer period, and as far as you’re committed to driving the vehicle that long and have adequate insurance cover, you’re likely to benefit financially. Just ensure you perform proper maintenance to extend the car’s service life.
Though you can spread the car payment over several years to bring it to a manageable number, it is still higher than you would pay if you were leasing the same car. When leasing you pay for the depreciation that occurs during the time you are driving the car and other charges, but not for the price advertised on the car.
Whether you paid for extended warranty coverage or not, when your factory warranty expires all the repairs carried out on the vehicle will be paid for straight out of your pocket. But, a leased car has nothing of such. As long as you follow the conditions of a leased car contract, the repairs aren’t your concern.
For a car that you took the buy option, you’ll be responsible for trading it in or selling it if you need to get a new car. And remember what we said about depreciation, you might have a difficult time getting a buyer that will match your evaluation of the car.
The good part about leasing a car is the lower monthly payments you have to take on. You don’t have to pay any upfront sales tax or register the car and there’s little to no down payment required. However, with a leased car there may be extra charges if you exceed the mileage allocated to you, terminate the lease early, or bump the car.
Most leased cars come with a manufacturer warranty for the duration of the lease, which means you never have to worry about getting hit with an expensive repair bill. But, you are still responsible for maintaining the engine, appearance of the car, regular upkeep, and auto insurance required by the state you live.
Leasing a car means that you’ve paid a sort of ‘rent’ on it for a fixed duration, typically 1-4 years. The total amount you pay on a monthly basis for the car is calculated from the amount of depreciation that is expected during the lease duration. This number varies with the make, model, and year of the car.
This is a good thing because you don’t want to be stuck in a situation where your vehicle is worth less than you owe the dealer for it, aka, “upside-down.”
One of the benefits of leasing a car is that you’ll always have the option of choosing a new one when your lease expires. This means you’ll be driving a car with new technology, comfort, and safety features instead of being stuck with a car you bought.
Once the duration stipulated in a lease agreement expires you simply have to return the vehicle, then you can choose to lease a new vehicle or continue with the current vehicle. But you never have to trouble yourself with selling the vehicle or getting a fair trade-in value for it. Alternatively, you could go with the option to buy the vehicle for a pre-set price at the end of the lease term.
If your credit score isn’t up to a number that the banks think is stellar, you might not get approval for a car loan – or you’ll be slammed with an enormous interest rate. Leasing companies are less strict compared to money lenders since it is within their right to take the car back if you fail to make payments on time or violate the lease terms.
Making regular monthly payments for the duration of your lease requires that you have a steady and predictable source of income. Incurring a major medical expense or losing your job can upset your finances, therefore it is important that you have strong income streams or, at the very least, a good backup plan.
If you are wondering “why have a mileage limit on leased cars, can’t they just lease it again?” Yes, they can lease the vehicle over and over, many times. But, the lease companies also have their eyes on the end game: they can’t lease these cars forever when newer ones are produced every year, so they need to have low mileage on the vehicle to get a good price for it later in the used-car market. Which explains why you’ll be charged heavily for exceeding the agreed limit.
It is much easier to get into a lease contract than it is to get out before then end of the agreed duration.
A leased car comes with very strict rules on how much customization you can do on the car, what shape you return it in, etc. after all, the lease company expects to lease it to someone else or sell it after your lease contract expires. Any dent on the car while in your possession will have to be fixed from your pocket unless you want the dealer to charge you to have it done.
So, other than normal wear and tear, you need to maintain the car in close to showroom condition or risk significant fees at the end of your lease.
If you thought that leasing a car will exempt you from purchasing an auto insurance cover, then think again because you’ll still need one. With leasing, the minimum insurance policy required is higher than if you were to own the car. Regardless of which option you choose, buying vs. leasing a car, it’s of utmost importance that you consult a reputable insurance agent that will walk you through all your options and which is best for you.
There’s no easy answer that fits everybody in the question of buying vs leasing a car. For most people, the disadvantages of buying a car are minimal and accepted as a typical cost of living the American life.
While you have lower monthly payments on a leased car, you never get to own the car at the end of the lease duration. The best way to understand the merits and demerits of buying vs leasing a car is to use a house. For a home that you pay a mortgage on, you get to call it yours when the loan is paid off, but the same can’t be said of living in a rented apartment.
Either way, Weighing the merits and demerits of buying vs leasing a car will help you make a decision that is right for you and your family. Make sure to avoid these common mistakes people make when buying a car.
Now you have an idea of the pros and cons for both buying or leasing a car, which one will be perfect for your lifestyle?
If you drive very short distances, have very few places to visit, or are in your 60s and don’t know how long you’ll be able to drive, then leasing a car will be better than buying. But, if you’ll be sharing the car with family, have lots of places to visit, errands to run etc that add up to over 10,000 miles then you’re better off buying the car so you don’t have to pay extra for exceeding the limit that comes with a leased car.
