Buying vs Leasing: What You Need to Know Before You Make a Decision
If you’re in the market for a new car, you should know that there are plenty of different options to choose from.
Many people enjoy leasing a car instead of buying one, while other people prefer to buy their car outright and pay off the loan.
Here’s what you need to know in order to make an educated decision about your options.
What Does it Mean to Lease a Car?
Leasing a car can best be compared to renting a car:
You make monthly payments until the car is paid off, according to the lease’s terms.
Here’s the catch:
Leases follow a payment schedule, spelled out in the contract you sign when you’re approved.
Your contract determines the length of the lease and your monthly payments.
This differs from paying an auto loan (discussed in detail below), since you’re not just making payments until the loan is paid off.
A notable downside to leasing is that contracts are hard to break before the agreed-upon lease length ends.
That means even if you could afford to pay off the rest of what you owe early, you might still face a penalty for doing so.
Once your lease is over, you’ll have the option to sign another lease contract for a new car, or buy the car you originally leased.
To be clear:
Leasing is essentially like renting a vehicle; and getting out of your lease early could carry some heavy penalties, regardless of whether or not you can afford to pay off the rest of your lease early or not.
Buying and Leasing Cars: A Cost Comparison
Monthly payments can vary greatly depending on whether you decide to purchase or lease a car.
Leasing a car might be a better decision for someone with a tight monthly budget since monthly lease payments are usually lower than monthly loan payments.
Why is this?
Lease payments are based on the car’s depreciation while you’re driving it, instead of the car’s total purchase price.
You will save some extra money every month by deciding to lease a car instead of purchasing one.
This is important to remember:
Leasing a car does not end in ownership.
Some people would rather have a higher monthly payment knowing that the payments will end when they pay off the car, and the car will be theirs.
This is not the case with a car lease. You will continue to make monthly payments on the car as long as you have a contract, and you will not own a car at the end of it.
A lease is cheaper from month to month, but what about overall?
Let’s take a closer look:
Based on a 6-year loan with a 2.9% interest rate and a down payment of $2,000, you’ll end up spending $31,952 over the course of 6 years. At the end of 6 years, your car will have a $9,675 resale value.
You’ll have equity in the car and be able to make some of the money you spend back, by selling.
A three-year lease with two leases back to back with two payments of $2,000 at signing will result in a total cost of about $24,664 at the end of three years. Keep in mind that you won’t have a car to sell at the end of the 3 years.
This means you’re spending money on something that will never belong to you.
A lot of leasing companies require you to have certain kinds of insurance in order for you to lease a car.
Collision and comprehensive coverage are usually required under a lease contract.
It’s also suggested that you purchase gap insurance as well.
Some lease companies incorporate the price of insurance into your contract so insurance is included in the price.
Purchasing a car allows you to choose the insurance you’d like, ultimately choosing the cheapest one if that’s something you want to do.
A down payment is the money you need to pay upfront to be able to purchase a vehicle.
Down payments usually range from 10-20% of the car’s total purchase price.
The exact amount of the down payment depends on a number of things:
Your credit score, the kind of car, your loan history, and the miles on the car will all affect the required down payment.
You’ll need to have your down payment in cash and get a loan for the rest of the car’s purchase price to purchase a car.
A common misconception is that leasing a car doesn’t require a down payment.
You can put a down payment down on a leased car if you’d like an even lower monthly payment.
Keep this in mind:
If you choose to put a down payment down on a leased car, that money will not go toward something you will eventually own.
As soon as you drive a purchased car out of the sale lot, it starts to depreciate.
The more miles you put on your new car, the less you’ll be able to sell it for when you have paid off the car.
A car lease is a little different since you will won’t own the car at the end of your contract.
You’re paying for the depreciation in your monthly payments so you don’t have to worry about how much your car is depreciating or how much it will be worth in the future.
On the downside:
You won’t have any equity in the car.
One of the biggest advantages of purchasing a car is flexibility.
You can decide to sell your car at any time, whether or not you’re at the end of the terms of your loan.
You can simply sell your car and use the money to pay off the remainder of your loan.
It’s not that simple with a lease.
Deciding to get out of a contract early will result in a lot of expensive fees. Charges can even be as expensive as just sticking with the contract for the designated time.
Think seriously about whether or not you want to get out of a lease contract early.
You’re free to drive your purchased car as frequently or as far as you’d like.
Your car will depreciate faster the more miles it has on it.
This affects the resale value if you ever sell your car.
A leased car is an entirely different story.
Typical lease contracts involve mileage limits. This usually ranges between 12,000-15,000 miles a year.
Going over the mileage limits will result in you paying extra fees for each mile you drove over the limit.
You won’t have to worry about the car depreciating or the resale value since you won’t have any equity in the vehicle.
Excessive Wear and Tear
Excessive wear and tear on a purchased car will affect the resale value when you go to sell the car.
You can pick and choose what you’d like to repair on your purchased vehicle, it’s completely up to you.
Excessive wear and tear on a leased car means you’re going to have to pay for anything more than ‘normal’ wear and tear.
Your lease contract will hold you responsible for paying for damages that are excessive.
You won’t be able to pick and choose which repairs you want to pay for.
The Bottom Line
There are many factors you should consider if you’re trying to decide between buying and leasing a car.
Buying a car means more expensive monthly payments and spending more money over the course of your loan.
It also means:
Investing your money in something you will eventually own, have equity in the vehicle that you can later sell, and having more freedom to do with the car as you wish.
Leasing a car means lower monthly payments and a new car to drive every 2-3 years.
You have mileage limits, you are stuck in a contract for a certain amount of time, and have less freedom to customize your car since it’s under contract.
Carefully weigh each of these factors when you’re trying to decide if buying or leasing is right for you.