When it comes time for your next (or first) car, there are many decisions to be made. Landing on a budget involves exploring the financial costs of buying new or used or leasing a new car. While purchasing a used car is generally thought to be the best financial decision due to the fact that you can beat many of the high costs of depreciation, leasing has become very popular in recent years.
In a lease, you aren’t paying on the principal of a car note. Your lease payments pay down the part of the car that depreciates while you are driving it, plus any interest. On a purchase, you are borrowing the entire sales price plus taxes and other fees and paying on that amount for a set number of years until the whole amount is paid off. Once you’ve fully researched buying and leasing options, you should be able to make an educated decision on the one that best fits your needs.
Leasing a Car
Leasing a car is similar to renting a house or apartment. These types of agreements are generally good for anyone who only foresees driving a car in the short term as most lease agreements are up after two or three years. However, the biggest hassles most lessees encounter include mileage limits (literal restrictions on how many miles you can drive a car per month,) as well as strict requirements for maintenance and upkeep.
There are downsides and benefits of leasing a car, truck or SUV. Before you sign a new lease deal on a car, consider the following:
Pros of Leasing
- In most cases, you will have a lower monthly payments due to the fact that you are only essentially renting the vehicle for the lease period – generally 2-3 years.
- You will be driving a new car. This may be all the reasoning you need to go ahead and lease. You’ll have all the latest safety and technology features of a new vehicle.
- You will have lower maintenance costs due to the fact that you’ll be driving a new vehicle. The vehicle will be under the manufacturer’s warranty the entire time you’re driving it, and many times oil changes and other scheduled maintenance are included in the cost of the lease.
- Because your payment will be lower, you could have money in your budget to lease a higher-priced vehicle.
- At the end of the lease, you don’t have to worry about selling the car or what the trade-in value is as you will just turn it back in to the dealership.
While all those points might make it seem like leasing is definitely the best way to go, there are definite downsides to driving a leased car that you should be aware of:
Cons of Leasing
- You will make monthly lease payments for years yet never own anything. You will never reap the rewards of driving a paid off vehicle, which is where you really get value out of this depreciating asset.
- There can be significant up-front costs associated with a car lease. These generally include a first month’s payment, security deposit, acquisition fee and other fees and taxes.
- Your lease contract will specify how many miles you can put on the vehicle during your lease term. Should you go over your mileage limit, you will be hit with excess mileage penalties that could potentially cost thousands of dollars.
- At the end of your lease, the vehicle needs to be returned maintained and in good condition. If you haven’t performed regular maintenance and/or you have excessive damage outside of normal wear on the vehicle, you will be charged for this when turning the vehicle in.
- It can be very expensive to get out of a lease should you need to turn the vehicle in early for any reason, such as adding a member to your family and needing a larger car. Early termination fees can cost thousands of dollars, nullifying any savings on monthly payments, down payment, etc.
Buying a Car
A new or used vehicle is most likely one of the largest items you will purchase outside of a home. For most people, this involves negotiating on a reasonable purchase price and financing, which will factor into the total cost of owning and driving your new car. Buying a new or used car is generally beneficial for drivers with good credit, as this determines the interest rate on a car loan to finance the deal. A better credit score and a higher down payment generally translate into lower loan payments while poor credit and less money down mean higher monthly payments.
Because of these money factors, you need to assess if purchasing your next car is right for you at this time. If you're considering buying a car, these are some major points to consider.
Pros of Purchasing
- When you’ve finished making payments on the vehicle, you own it outright. The longer you drive it, the more equity you build up. This equity can be used as a down payment on your next vehicle or you can sell the vehicle and use the cash for anything you want or need.
- You can drive as many miles as you need without worry of being tacked with overage fees like at the end of a lease. This is a large plus should your commute get longer due to a job change or residential move.
- You don’t need to worry about the occasional ding or scratch. You can choose to fix these or not, although this will slightly affect your trade-in or sale value when the time comes to get a new car.
- You can change vehicles when you want without being punished with early termination fees. This allows you to make a vehicle change should your circumstances change suddenly.
- Purchasing a late-model used vehicle 2-3 years old is generally considered the best financial decision when in need of a new car. You won’t pay the high depreciation experienced in the first couple of years, the price will be lower and you may be able to afford a higher priced, better-equipped vehicle.
While purchasing has some stand-out advantages, there are disadvantages when compared to leasing a vehicle. Here are the big ones:
Cons of Purchasing
- If you like to drive a new, updated car every few years, purchasing will not be your best bet. You will always be battling the high depreciation of the first 2-3 years of car ownership and never build up equity in your vehicle.
- Sometimes a down payment will be required and this could be higher than the up-front costs of leasing a car.
- Because your car payment on a loan will be higher compared to the same vehicle on a lease, you may need to purchase a cheaper car that isn’t as well-equipped as you’d like.
- Many times there are extra incentives on a leased vehicle that you can’t get on a vehicle you are purchasing.
- If you take out a loan for more than 5 years, you could spend quite a bit of time “upside-down” in your loan – where you owe more than the actual value of the car.
Lease or Buy a Car: Making Your Best Decision
There is no definitive answer to whether leasing or buying a car is better for anyone. This is a personal decision where you have to weigh your wants and needs and come to the conclusion that best fits your situation. Knowing your budget, how often you like to switch into a newer vehicle, the number of miles you need to drive, the type of vehicle you’d like to drive and any other personal details that affect your decision will be helpful when deciding whether to lease or buy your next vehicle. Doing your research on the costs of buying or leasing your desired car, truck or SUV will also put you in a good place to get into a new driver’s seat.