Leasing Versus Owning a Car
While there are many factors to consider, knowing whether to lease or buy depends largely on your budget, the vehicle you want, how much you plan to drive it, and for how long.
Choosing between leasing versus owning a new vehicle doesn’t have to be a stressful process. With the right information and some simple planning, you will select the right vehicle to suit your budget and lifestyle.
How does leasing work?
Most consumers understand how to purchase a car, but may not understand what leasing really entails. When you lease a car, you are “borrowing” it at a price. The car doesn’t belong to you and is not considered one of your assets. This means that at the end of the lease, you get to exchange the vehicle with a brand new one (on a new lease), and the process begins again. While this may seem appealing, there are many other positive and negative factors to consider before exploring a lease.
Benefits of leasing
Most of the benefits of leasing are directly related to cost, but there are other conveniences to consider as well.
It costs less
Since you’re only paying for the depreciation of the vehicle, and not the vehicle itself, the down payment and monthly payments are typically lower for a leased vehicle.
If your dream car or truck has always seemed just out of reach, leasing may make it possible. Because of the wiggle room in your budget when you lease, you might be able to afford a nicer vehicle than you would if you were purchasing it.
All the bells and whistles
As manufacturers upgrade features and options, you’ll be able to upgrade to the latest model when your lease ends. When you purchase a vehicle, you typically own it longer than the typical lease term, so you have to wait on your upgrade.
No trade-in negotiating
If you’ve ever traded in a car, you know the stress of making it look its best, worrying about blemishes and wondering if you’re getting a fair offer. With a lease, you simply hand over the keys and go.
Consult a tax accountant before signing a lease. Depending on the lease terms and the state in which you live, there might be additional tax breaks to drive the overall cost of your lease down even further.
The downside of leasing
If all of the benefits sound too good to be true–they might be. Depending on your circumstances, there are some significant pitfalls of leasing to watch out for.
One of the biggest negatives about leasing is that once you turn in the keys on your leased vehicle, you’re out every penny you spent on it. You don’t own the asset, and you don’t get credit for the money you’ve spent.
You need great credit
If your credit score has a bit of tarnish on it, you may not want to explore a lease. Since the dealership is taking a risk in letting you “borrow” their car, they only consider well-qualified applicants.
Nearly every lease comes with a limit on the number of miles you are allowed to drive the vehicle without penalty. The average is about 15,000 miles per year, but it can vary. If you go over the limit, you’re responsible for the over-mileage fees.
Most lease contracts have stipulations that require the lessee to bring the vehicle in for regular maintenance. You’ll need to prove that maintenance checks were completed, and may need to purchase a rider to your auto insurance policy to cover the cost of major damage or if your car is totaled in an accident. That insurance money goes straight to the dealership that owns the car.
Wear and tear expense
While you won’t have the stress of negotiating a trade-in, you will need to make sure the vehicle is in its original condition. You should expect your auto dealer to perform a close inspection and add on extra charges for any wear and tear they find.
Benefits of buying
If you’re concerned with equity and control over your vehicle, purchasing might be a better option. Here are five of the biggest benefits.
Once you purchase a vehicle and pay it off, it belongs to you. It’s your asset, and any equity it might hold belongs to you.
Credit is more accessible
In general, consumers who want to purchase a vehicle on loan have a higher success rate of obtaining credit. There is less risk for the dealership, so they offer a wider range of financing options. You’ll still need a good credit score, but you can have a few dings and still get a car, in most cases.
You build resale value
Since you own the vehicle once all payments are made, you own any equity associated with it. If you decide to sell the car, the money is yours to keep.
Maintenance is up to you
While you’ll want to keep your vehicle running smoothly to protect your asset, you don’t have to save maintenance receipts or prove upkeep when you own the car.
You don’t need extra insurance
While you still need to maintain an auto insurance policy,you won’t need the extra insurance that is typically required by dealerships to protect the vehicle they lease to you.
The downside of buying
Just like with leasing, there are negative factors to consider before purchasing a vehicle.
You’re stuck with it
Unless you decide to sell or trade-in your vehicle, you’ll likely own it for a long time. You may miss out on new features and functionality as newer models hit the market.
You’ll pay more over time
Auto purchases come with interest charges (unless you pay cash). Your monthly payments may be higher and last longer when you purchase instead of lease.
You may need a down payment
Since the total purchase price is higher than with a lease, you will likely need a sizeable down payment to secure financing.
It will depreciate
The hard truth is that your vehicle will lose value the minute you drive it off the lot. While it will hold resale value, be aware that depreciation can accelerate quickly over the life of your vehicle.
How do you choose?
If you have the income (or cash) and the down payment to spend on a purchase, you may benefit from owning your vehicle and having full control over it. If it’s more important to have a new car every two or three years, then leasing might be right for you. Consider your lifestyle, how much you plan to drive the car and what you can realistically spend, and let it be your guide.