Is it Better to Buy or Lease a Car? A Real-World Guide to Car Ownership.
Everyone has their own reasons for needing a new car, but what is the most important aspect of the decision to you? Do you value ownership and want the vehicle to truly belong to you? Do you want to treat the car as an investment that you will cherish and maintain for 5-10 years?
Or maybe cruising down the highway in a brand new car every 3 years is more your style. Numerous factors can weigh on your decision-making, such as monthly payments, equity, mileage, and maintenance costs.
Buying a new car means you are making an investment – the car becomes your personal property to do with as you see fit, whether that means selling the car whenever you please or modifying the car to your liking. With leasing, you are “borrowing” a car and paying the depreciation that occurs while in your possession, plus interest and fees. At the end of the lease you have the option to return the vehicle or purchase for the residual value.
Comparing Expected Car Payments When You Buy or Lease
For many, cost is a primary consideration when it comes to the decision to lease or buy. Like any decision, both buying and leasing have their own set of financial drawbacks and benefits.
The upfront cost of purchasing a car makes it seem like leasing is the more affordable option, but keep in mind that purchasing a car is an investment that builds equity (despite the fact that the value decreases over time). At the end of the monthly loan payment period – typically 60-72 months – the car can be treated as an asset.
On the other hand, when it comes to the actual monthly costs, a car lease is almost always less expensive on a month to month basis than loan payments. A more affordable monthly commitment is enticing to many, but leasing a car means the vehicle is not your property and thus does not typically build equity. However, some lease contracts will allow the lessee apply their monthly payments towards purchasing the car after the initial 2-3 year contract period – it’s the best of both worlds!
Building Equity with Monthly Loan or Lease Payments
What is equity when it comes to acquiring a new car? Equity is generally regarded as the total value of an asset. Purchasing a car outright is an attractive notion to many because, as an owner, it means you have the opportunity to eventually sell the car and receive a return on your investment.
At the end of a lease period, you give up the keys and receive absolutely no return on your payments. For some, this is acceptable. Trading up for a newer vehicle every few years is exactly what makes a lease so attractive for many. Leasing can be an exciting prospect, and may provide more emotional satisfaction – if you love that new car smell and want to always drive one of the newest models available, car leases are ideal.
Although pure car leasing does not build any equity, it offers the excitement of driving a new car without as many commitments and is typically more flexible. If you decide you want to keep your leased vehicle at the end of the lease period, you can simply pay the residual cost to the dealer and take on ownership.
To Buy or Lease - The Mileage Consideration
How much you plan on driving the new car is hugely important to the buying decision. Since the cost of a lease is determined by the depreciated value of a car, then the amount of miles you drive in that car is going to dramatically alter the cost of the lease.
Most car lease deals specify the maximum amount of miles you can drive per year. The number of miles varies with each lease, but typically the number is within the 12,000-15,000 mile range.
If you plan on exceeding this limit, even by a small amount, it might be worth it to consider buying instead. Lessee’s can expect to pay anywhere from 5-20 cents per mile for driving over the mileage limit. If you have a long work commute or plan frequent weekend trips, leasing may not be financially viable for you. Buying a car means it imposes no mileage limits, and despite it affecting the overall value of the vehicle in the long run, immediate costs only include gas and maintenance.
Don't Forget the Maintenance
One great benefit of leasing a car is the relative absence of maintenance fees. Since the lease payments only cover the depreciation of the car over time, mechanical issues are generally covered by the dealer’s service center (assuming it wasn’t explicitly caused by the driver).
On the other hand, violating the wear and tear clause of a lease typically incurs harsh penalties. There is a fine line between what is considered acceptable wear and tear. Smokers, pet owners, and large families should be especially wary of leasing, as cigarette burns, chewed seat belts, and stained upholstery can end up costing a fortune at the conclusion of the lease.
When buying a car, the owner accepts responsibility for all car maintenance. Car repairs can be very expensive, and mechanical issues are often unpredictable. Make sure you can afford it if an issue pops up, and take the warranty into account when shopping for new vehicles. Keeping up with maintenance can ensure the value of the car in the long run, and is a big consideration if you ever plan on selling.
To Buy or Lease - A Quick Summary
Pros of buying a new car:
- The car is yours – you are free to sell or trade in your car at any time.
- As you make loan payments, you will build equity in an asset that you own.
- Auto insurance is generally cheaper when you buy, especially over time. With a lease, you are always paying a premium because it’s a newer car.
- No mileage restrictions – If you plan on driving more than 12,000 miles a year, buying makes more sense.
- If you expect a lot of wear and tear (families and pet owners, pay attention here), you won’t incur the dealer fees that you would with a lease.
- Despite higher monthly payments, it’s generally a better value long term.
Pros of leasing a new car:
- Lower monthly payments. And if you have a lower credit score, leasing terms may be more attractive than a high interest loan.
- Risk is minimal – it’s less of a financial commitment and you can walk away from the lease if you need to (with a minimal penalty).
- Depending on your business, you may be able to write off the monthly payments as business expenses on your tax returns.
- You sometimes have the option to turn the lease into a full purchase if you decide you want to keep the vehicle.